M/S. KONE ELEVATOR INDIA PVT. LTD. v. STATE OF TAMIL NADU AND ORS.

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A (Writ Petition (c) No. 232 of 2005)

MAY El6, 2014 B [R. M. LODHA, CJI, A. K. PATNAIK, SUDHANSU JYOTI MUJ<HOPADHAYA, DIPAK MISRA AND FAKKIR MOHAMED l~RAHIM KALIFULLA, JJ.]

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A 1.1. The significance of the issue involved in these matters is that if the contract for manufacture, supply and installation of lift in a building is a "contract for sale of goods" the entire sale consideration would be taxable under the sales tax or value added tax enactments of the B State legislatures, whereas if it is a "works contract", the consideration payable or paid for the labour and service element would have to fle excluded from the total consideration received and sales tax or value added tax would be charged on the balance amount. In the instant C case, the petitioner is engaged in the manufacture, supply and installation of lifts involving civil construction. [Para 3-4] [942-8-E] 1.2. The authorities clearly show that a works contract could· not have been liable to be taxed under the State o sales tax laws and whether the contract was a works contract or a contract for sale of goods was, earlier dependent on the dominant intention as reflected from the terms and conditions of the contract and many other aspects. [para 27] [959-C-D] E State of Madras v. Gannon Dunkerley & Co., (Madras) Ltd. (Gannon Dunker/ey-1) 1959 SCR 379 = AIR 1958 SC 560Car/ Still G.m.b.H. & Another v. State of Bihar and others 1962 SCR 81 = AIR 1961 SC 1615 State of Gujarat v. M/s. Kai/ash Engineering ·ca. (Pvt.) Ltd. 1967 SCR 543 = AIR F 1967 SC 547; The State of Madras v. Richardson & Cruddas Ltd. (1968) 21 STC 245 (SC); State of A. P v. Kone Elevators (India) Ltd. [2005] SCR 152 =(2005) 3 SCC 389; State of Rajasthan v. Man Industrial Corporation Ltd. 1969 (3) SCR 505 = 1969 (1) -sec 567; State of Rajasthan and others v. G Nenu Ram (1970) 26 STC 268 (SC); State of Punjap v. Mis. Associated Hotels of India Ltd. 1972 (2) SCR 937 = 1972 (1) SCC 472; Vanguard Rolling Shutters and Steel Works v. Commissioner of Sa/es Tax 1977 (3) SCR 165 =1977 (2) SCC 250; Federation of Hotel and Restaurant Association H of India v. Union of India and others 1989 (2) SCR 918 = 1989

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A Dunkerley-II**, has unequivocally restated and reaffirmed the principle that the States have legislative power to impose tax on the transfer of property in goods or in some other form in the execution of works contract and they have also the power to bifurcate the contract and B levy sales tax on the value of materials used in the execution of the works contract, regard being had to the principle that the State Legislatures have been empowered under Clause (29A) of Art:366 to levy tax on the deemed sales. [para 29 and 31] [960-H; 961-A-B; 963- C B-0] *Builders' Association of India and others v. Union of India and others 1989 (2) SCR 320 = (1989) 2 SCC 645 - relied on **Mis Gannon Dunkerley and Co. and others v. State of D Rajasthan and others (Gannon Dunkerley-I/) 1992 (3) Suppl. SCR 103 = (1993) 1 SCC 364 - followed. 1.5. It is significant to note that in Larsen and Toubros, it has been stated that after the constitutional amendment, the narrow meaning given to the term "works contract" in Gannon Dunkerley-/ no longer survives. It has been observed in the said case that even if in a contract, besides the obligations of supply of goods and materials and performance of labour and services, some additional obligations are imposed, such contract does not cease to be works contract, for the additional obligations in the contract would not alter the nature of the contract so long as the contract provides for a contract for works and satisfies the primary description of works contract. It has been further held that once the characteristics or elemerits of works contract are satisfied in a contract, then irrespective of additional obligations, such contract would be covered by the term "works contract" because nothing in Art. 366(29-A)(b) limits the term "work~ contract" to contract for labour and service only. [para 40] [968-8-E]

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& ORS. $Larsen and Toubro Limited and another v. State of A Karnataka and another (2014) 1 sec 708 - affirmed 1.6. At this juncture, it is condign to state that four concepts have clearly emerged, viz. (i) the works contract is an indivisible contract but, by legal fiction, is divided into two parts, one for sale of goods, and the other for B supply of labour and services; (ii) the cone-apt of "dominant nature test" or, for that matter, the "degree of intention test" or "overwhelming component test" for treating a contract as a works contract is not applicable; (iii) the term "works contract" as used in Clause (29A) of C Art. 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 D the parties, any additional obligation incorporated in the contract would not change the nature of the contract. [para 42] [969-A-C] Bharat Sanchar Nigam Ltd. and anotherv. Union of India = and others 2006 (2) SCR 823 2006 (3) SCC 1; Associated E

Cement Companies Ltd. v. Commissioner of Customs 2001

(1) SCR 608 = 2001 (4) SCC 593; K. Raheja Development = Corporation v. State of Karnataka 2005 (3) SCR 1210 2005 (5) SCC 162; State of UP. and others v. P.N.C. Construction Co. Ltd. and others 2007 (8) SCR 927 = 2007 (7) SCC 320 F Hindustan Shipyard Ltd. v. State of A. P. 2000 (1) Suppl. SCR = 592 (2000) 6 sec 579 - referred to 1.7. In OTIS Elevator$, the High Court opined that after the lifts were properly ~rected and installed in the building, they became permanent fixtures of the G premises. It took note of the t~rms 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 H

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A erecting and installing the apparatus. After so stating, the High 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 0 contract. Further 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 E parameters keeping in view numerous factors. The installation requires considerable skill and experience. The labour and service element is obvious. [para 43 and 64] [972-A-E; 985-B] $$QTfS Elevator Company (India) Ltd. v. The State of F Maharashtra (1969) 24 STC 525 (Born) - approved. Name Tulaman Manufacturers Pvt. Ltd., Hyderabad v. Collector of Central Excise, Hyderabad 1988 (3) Suppl. = SCR 1 (1989) 1 SCC 172; Collector of Central Excise, G Calcutta-I/ v. Eastend Papers Industries Ltd. 1989 = (3) SCR 1017 (1989) 4 SCC 244; Aspinwall & Co. Ltd. v. Commissioner of Income Tax, Ernakulam 2001 (2) Suppl. SCR 559 = (2001) 7 SCC 525; MIL India Ltd. v. Commissioner of Central Excise, Noida 2007 (3) SCR 476 = H (2007) 3 SCC 533; Sirpur Papers Mills Ltd. v. Collector of

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& ORS. Central Excise, Hyderabad 1997 (6) Suppl. SCR 431 = A (1998) 1 sec 400 - referred to. Underwood Limited v. Burgh Castle Brick and Cement Syndicate (1922) 1 KB 343 - referred to. 1.8. As far as installation of the lift is concerned, it has to be understood in the conceptual context of the manufacture and installation of a lift in a building. The lift basically comprises components like lift car, motors, ropes, rails, etc. having their own identity even prior to installation. Without installation, the lift cannot be mechanically functional because it is a permanent fixture of the building having been so designed. Therefore, the installation of a lift in a building cannot be regarded as a transfer of a chattel or goods but a composite contract. [para 48] [974-G-H; 975-A] D 1.9. This Court is of the convinced opinion that the principles stated in Larsen and Toubro 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 Art. 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. [para 63] [984-C-E] 1.10. Involvement of the skill has been elaborately dealt with by the High Court of Bombay in Otis Elevator and the factual position is undisputable and irrespective of whether installation is regulated by statutory law or not, the result would be the same. This position is stated· in respect of a composite contract which requires the contractor to install a lift in a building. It is significant to note that if there are two contracts - one, for purchase of the components of the lift from a d·ealer, it would be a H

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A contract for sale; and two, if a separate contract is entered into for installation, that would be a contract for labour and service. But, a pregnant one, as in the instant matters, once there is a composite contract for supply and installation, it has to be treated as a works contract, B 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., c building, and prepared for delivery. [para 64] [985-F-H; 986-A-B] Patnaik & Co. v. State of Orissa (1965) 2 SCR 782 - distinguished. 1.11. In Kone Elevators case, the three-Judge Bench D ruled that a dealer carries on business of selling lifts and elevators and 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 are incidentally used E and, therefore, the delivery of the end product by the assessee qua the customer has to be constituted as a sale and not a works contract. This Court is of the opinion that in Kone Elevators the principal logic applied, i.e., the incidental facet of labour and service, is not correct. [para F 54,. 57 and 64] [981-C-D; 984-D] 1.12. What has been taken note of in Kone Elevators 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. G 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 H el~ment is involved. Individually manufactured goods

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& ORS. such as lift car, motors, ropes, rails, etc. are the A 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 B permanent fixture of the building. [para 64) [985-C-F] 1.13. The conclusion, as has been reached in Kone Elevators, 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 arid materials as well as installation of the lift which obviously conveys performance of labour and service. Thus, the fundamental characteristics of works contract are satisfied. Thus analysed, this Court holds that the decision rendered in Kone Elevators does not correctly lay down the law and it is, accordingly, overruled. [para 64) [986-B-D] State of A. P v. Kone Elevators (India) Ltd. [2005] SCR 152 = (2005) 3 sec 389 - overruled. E 2.1. The writ petitions have been filed either against the show-cause notices where cases have been reopened or against the orders of assessment framed by the assessing officers and civil appeals have been filed against certain assessment orders or affirmation thereof which are based on the decision of the three-Judge Bench in Kone Elevators case. Considering the factual matr!x, it is directed that the show-cause notices, which have been issued by taking recourse to reopening of assessment, shall stand quashed. The assessment orders which have been framed and are under assail before this Court are set aside. [para 65] [986-E-F] 2.2. Where the assessments have been framed and have attained finality and are not pending in appeal, they

922 SUPREME COURT REPORTS · [2014] 5 S.C.R.

A 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 this judgment. [para 65] [986-G] T. V. Sundram Iyengar & Sons v. State of Madras 1975 B (2) SCR 372 = 1975 (3) SCC 424, Union of India v. Central India Machinery Manufacturing Company Ltd. and others 1977 (3) SCR 437 = 1977 (2) SCC 847, Titan Medical Systems (P) Ltd. v. Collector of Customs, New Delhi 2003 (9) SCC 133; Commissioner of Central Excise, Ahmedabad C v: Solid & Correct Engineering of Works and others 2010 (.:\) SCR 476 = 2010 (5) sec 122- cited. J. Marcel (Furrier) Ltd. v. Tapper (1953) 1 All ER 15 and Love v. Norman Wright (Builders) Ltd. (1944) 1 All ER 618; Anglo-Egyptian Navigation Co. v. Rennie (1875) LR 10 CP D 271; Detroit Steel Cooperage Company v. Sistersville Brewing Company 58 L.Ed. 1166 - cited. Per Fakkir Mohammed Ibrahim Kalifulla, J(Dissenting): 1.1. The manufacture, supply and installation of lifts E are to be treated as a contract of 'Sale'. [para 1] [987-8] State of Andhra Pradesh vs. Kone Elevators (India) Pvt. Ltd. 2005 (2) SCR 152 = (2005) 3 sec 389 - affirmed. Mis. Patnaik and Company vs. State of Orissa 1965 SCR 782 =AIR 1965 SC 1655 - relied on. F 1.2 As and from 16.05.2008, the erection, commissioning or installation of lift and Escalator would fall within the expression 'works contract' having regard to the specific definition so brought out under the G Finance Act, 1994 w.e.f. 16.05.2008 for the purpose of Service Tax. [para 31] [1009-D] Commissioner of Central Excise, Ahmadabad vs. Solid and Correct Engineering Works and others 201 O (4) SCR 476 = (2010) 5 SCC 122 - referred to. H 1.3. Even after the Constitutional Amendment

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& ORS.

introducing Art. 366(29A)(b), it will have to be necessarily A examined for its application as to whether a particular contract would fall within the expression 'works contract' and only thereafter, the incidence of taxation as provided in the said sub-clause could operate. This principle has also been emphasised in the decision of Larsen & Toubro B Ltd*. [para 7] [989-F-G] The Commissioner of Commercial Taxes Mysore, Bangalore vs. Hindustan Aeronautics Ltd. (1972) 1 SCC 395; and *Larsen & Toubro Ltd. vs. State of Karnataka 2013 (12) SCALE 77 - referred to. C 1.4. In the instant case, admittedly, the business of the petitioner is manufacture and supply of lifts/elevators as well as its installation. It is not the case of the petitioner that mere installation/ erection of lift/elevator simpliciter is their business activity. It cannot also be said D that the job of installation/erection of a lift/elevator can be done only by lift/elevator manufacturers. Thus, manufacture of lift and erection of a lift can be independently handled by different persons. [para 52] [1020-8-D] E 1.5. In the instantcase, the terms of the contract are significant, though it is one single contract, it contains separate terms and conditions dealing with different aspects relating to the supply and erection of the elevator. The petitioner while agreeing to supply an elevator of a specific model, highlighted the details of the lifts, such as, its technical details, advantages of its product and other sophisticated equipments put into the product. In fact, if at all any work element is involved in the activity of supply of the ·lifts/elevators, the major part of the work has been directed to be carried out by the purchaser, in its premises, in order to enable the petitioner to erect its lift/elevator in the said premises. In a very insignificant manner, the petitioner undertakes to H

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A attend to certain aspects while erecting the lifts in the premlses of its ·purchaser, such as connecting the power supply to the lift after fixing it in the identified place where the purchaser has prepared the hoist/well in its premises and such other aspects as mentioned in the contract. The B petitioner cannot be heard to say that it brings different parts of the lift and that its activity of assembling the ~ame in the premises of the purchaser should be construed as one of service. In view of the nature of product that the petitioner agreed to supply to its . c purchaser, it has to necessarily assemble different parts in the premises of the' purchaser and thereby, fulfill its contract of supply of the lift/elevator in a working condition. [para 1O and 55] [991-A; 1021-G-H; 1022-A-D] 1). When examining the claim of the petitioner that o what was agreed by it in the contract with its purchaser is nothing but a 'works contract', such a claim should be explicit and must be discernible from the contract itself. When in the contract the element of 'works contract' is totally absent and what was agreed between the parties was only supply of its elevator for a fixed price, mere m~ntioning of the expression 'works contract' or by making reference to the basis for fixing the cost of labour involved in the manufacture or by simply using the expression 'works contract' without any scope of performing any work at the command of the purchaser, the petitioner's claim to hold its activity as a 'works contract' cannot be accepted on mere asking: the contract must disclose in no uncertain terms that it was one for carrying out 'the work' and the supply of the materials were part of such agreement to carry out any such specified work. In the instant case, it is the other way around, the contract is only for supply of lifts/elevator and whatever element of works which the petitioner claims to carry out in effecting the supply is virtually very insignificant as compared to the element of sale, which H

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& ORS. is paramount as found in the terms of the contract. The A whole of the preparatory work for the erection of the lift is that of the purchaser and the petitioner merely goes to the purchaser's premises and fixes the various parts of the lift in the slots created for it. [para 56] [1022-E-H; 1023-A-B] B 1.8. While making a deeper scrutiny of the terms of the contract as a whole in Annexure A•1, which is the acknowledgement of the Order dated 23.12.2009, the contents of the letter also state that the petitioner received the order placed with it by the purchaser and it is C ·prepared "to supply and install One (1) No. OTIS Electric Traction Passenger Elevator". The other set of terms are called as 'Preparatory Work'. Under the said head, it is mainly stated as to the nature of preparatory work that the purchaser will have to organize in its premises, such as, the time within which such preparatory work is to be carried out, which would require the purchaser to design and furnish what is called as elevator hoist way/structure to provide in its building to enable the petitioner to supply its lift and locate it. It contains as many as 21 different aspects of preparatory work. It could not be held to be a service or work for which the contract was entered into. It is like doing some incidental work for fixing a Fan or an Air Conditioner. [para 57, 59 and 60] [1023-B-C; 1024- C, D; 1025-B] F 1.9. There is no basis in the petitioner referring to the Price Variation Clause under the caption 'works contract'. Therefore, it can be validly stated that by calling the Price Variation Clause as an 'elevator works contract', the contract cannot be construed as a 'works contract'. On G the other hand, going by the stipulations contained therein viz., that the claim for manufactured materials should be paid along with material invoice and the installation charges to be paid based on final invoice makes it clear that the contract is divisible in its nature H

926. SUPREME COURT REPORTS [2014] 5 S.C.R.

A and to call it an indivisible one, is contrary to its own terms. [para 62] [1026-G-H; 1027-A] 1.10. When examining the "conditions of the contract", in the first instance, the most relevant and clinching condition. is the one relating to the payment to be effected by the purchaser, which is to the effect that on signing the contract, 90% of .the contract amount should be paid and the balance 10% either on the commissioning of the ljft or within 30 days of the petitioner's offer to commission the lift and if for any delay caused beyond the control of the petitioner, within 90 days from the date the materials are ready for dispatch at the premises of the petitioner. The agreed period for execution of the supply of the lift, as per the contract, is 52 weeks i.e., one full year. The terms relating to payment o in Condition No.5 and the right retained by the petitioner to cancel the contract for any reason whatsoever under Condition No.8 disclose that for mere signing of the contract for supply of the lift, the petitioner would get the whole value of it without any corresponding obligation to effect the supply or to suffer any damages. The said outcome based on the payment conditions when read along with the other stipulations, disclose that the claim for manufactured materials should be paid along with the material invoice and the claim for installation should be paid along with their final invoice. It further makes it abundantly clear that the right of the petitioner to realize the full value of the materials of the lift to be supplied does not entirely depend upon the installation part of it. Supply of materials of the lift and installation costs are separately worked out in order to ensure that irrespective of the installation, the petitioner will be able to realize the value of the material cost. This conclusion which is based on the terms of the contract also strengthens the reasoning that the contract is not an indivisible one and is always separable i.e., one for supply of materials and the miniscule part of the work involved. The division of 90%

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& ORS. payment in the first instance and the balance 10% under certain other situations, fully supports the conclusion.If the conditions of the contract relating to payment are discernible to that effect, it can only be stated that the contract of the petitioner with the purchaser is virtually for the manufacture of the materials and for its absolute readiness to supply those materials and nothing more. The sum and substance of the conditions of the contract de hors the other clauses is only to that effect. Op a detailed consideration of the conditions of the contract, one will not be able to state with any certainty that the c contract has got anything to do only with any work or service to be performed in the course of supply of the lift/ elevator by the petitioner. [para 64-66] [1027-C-H; 1028- A-E; 1029-C, D, G] 1.11. The signed part of the contract makes it clear that the price is inclusive of indirect taxes, as is currently applicable either leviable by the Central Government or State Government or any local Authority, including Excise Duty and Service Tax. However, it also states that in the event of any such statutory levy or payment of tax or otherwise faced by the petitioner, then under such circumstances, that should be borne by the purchaser. [para 67] [1029-H; 1030-A-B] 1.12 Keeping in view the terms of the contract threadbare, it can only be concluded that the contract in the instant case is only one for the manufacture and supply of the lift/elevator and the installation though mentioned in the contract, has very insignificant relation to the consideration agreed upon between the parties. In any event, the contract of supply and installation are divisible in very many aspects, it is difficult to hold that it is a 'works contract'. Therefore, it will have to be held that the manufacture, supply and erection of lift/elevator agreed upon by the petitioner to any of its customers, would only fall within the expression 'sale' and ca·n never H

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A be called as 'works contract'. Once that is the conclusion that can be made based on the contractual terms as agreed between the petitioner and its customers, the application of Art. 366(29A)(b) cannot be made and does not in any way support the claim of the petitioner. [para B 68] [1030-C-E] / 2.1. The definition of 'works contract' u/s 2(jj) of the Orissa Sales Tax Act, 1947 states that it would include any agreement for carrying out for cash or deferred payment or other valuable consideration, among other activities, fabrication, erection installation o~commissioning of any movable or immovable properw. The most mandatory requirement for invoking the said provision and for applying the said definition would be that the whole of the agreement should be for carrying out the work of fabrication, installation or erection of a movable or immovable property. Significantly, the expression 'manufacture' is absent in s. 2(jj). [para 70-71] (1031-A, F- G] , 2.2. As far as a lift is concerned, in one sense it can be called as a movable property When it is in the course of operation after its installation and that it is not embedded to the earth permanently while, in .another sense, having regard to the manner in which the lift is installed in a· premises, it can also be stated to be part of an immovable property. However, whether as a movable property or immovable property, it may not make any difference while considering the other prescriptions contained in the s.2 (jj) of the Orissa Sales Tax Act. [para 71] [1031-C-E] G 2.3. In the instant case, as per the· agreement between the parties, the purchaser is bound to pay 90% of the agreed sum at the time of signin'g of the contract itself and the balance 10% within 90 days from the day the petitioner gets. the materials. ready for dispatch in its H

KONE ELEVATOR !NOIA PVT. LTD. v. STATE OF T.N. 929 & ORS. premises, if it could not commission as agreed or within A 30 days of its readiness to commission. Therefore, the whole of the valuable consideration becomes payable and was relatable _or as agreed upon by the parties merely for the petitioner's readiness to take up the contract of supply of the elevator and for its endeavour to effect the manufacture, procure the entire materials for a lift/elevator and keep it ready for dispatch in its premises. [para 74) (1033-C-E] 2.4. It cannot be said that there was any sordid • agreement as between the· petitioner and the purchaser for any valuable consideration only for the purpose of carrying out erection/installation of the lift in the premises of the purchaser. If for any reason after the full payment is effectuated by the purchaser as per the term relating to the payment of the contracted amount, due to any fault O of the petitioner, the contract could not be performed, there is no specific clause which would entitle the purchaser to seek for enforcement for erection/ installation. Merely mentioning in .some Clauses that the contract is otherwise indivisible 'works contract' will not by itself make it indivisible or a 'works contract'. In the factual and legal outcome as per the terms of the contract, it will have to be held that there is no scope to apply s.20j) of the Orissa Sales Tax Act to the case on hand and to hold that the manufacture, supply and installation of the lift by the petitioner would fall within the said definition of 'works contract'. {para 75-76) (1034-A- D, ~H; 1035-A] 3.1. Besides, the provisions of the Contract Act stipulate the element of offer, acceptance and consideration for a concluded contract. In the case on hand, the offer would be for supply of the lift as described in the proposal made by the petitioner. The consideration upto 90% would become payable the moment the purchaser agrees to the 'proposal made by the petitioner H

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A and the balance 10% can also be collected without any positive guarantee for completion of erection or installation of the lift under certain contingencies without any corresponding right in the purchaser to seek for enforcement of the erection/installation. In fact for B payment of the balance 10% under such contingencies, what all the petitioner has to show is that the materials meant for the supply of the lifts are ready for dispatch in its premises, which would mandate the purchaser to make the payment within 90 days of such readiness as c a reported by the petitioner. In effect such contract as agreed between the petitioner and its purchaser as per the provisions of the Contract Act if were to be considered for the invocation of the definition of 'works contract' u/s 2(jj) of the Orissa Sales Tax Act, it can be found that the said contract does not in any way create 0 any legal obligation on the petitioner to effect erection or installation of the lift as a movable or immovable property, satisfaction of which contract alone will attract the definition of 'works contract' u/s 2(jj) of the Orissa Sales Tax Act. [para 77f [1035-C-G] E 3.2. As per the payment terms, the parties agreed specifically to the effect: "under this clause claim for manufactured materials shall be paid along with our material invoice and claim for installation labour shall be F paid along with our final invoice." In fact the copies of the two invoices dated 17.12.2009 and 20.09.2010, clearly explain the fact that the first one related to material cost and the subsequent one only related to labour cost. [para 79] [1036-E-F] G 3.3. The provisions of the Bombay Lifts Act, 1939 leave no scope to reach a conclusion that a contract as between the petitioner and the purchaser would come within the definition of the 'works contract'. [para 80] [1037-B] H

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& ORS. Re: OTIS Elevator Co. (India) Ltd. (1981) ELT 720 - held inapplicable. 3.4. Sections 65(29), 65(39a) and 65(105) (zzd) and (zzzza) of the Finance Act, 1994 are all provisions for the levy of Service Tax. It is well known that while interpreting taxing statutes, strict and literal interpretation should be made. In T.S. Devinatha Nada*, this Court has 'held that what is applicable to another taxing statute may not be applied to a case governed by sales tax statutes. Since s. 65 and the various sub-sections, namely, sub-ss. (29), (39a), (105), (zzd), (zzzza) put together are only relatable to Service Tax, the question of importing the said definition of 'works contract' in the explanation to s.65(105)(zzzza) to the provisions of Sales Tax Acts cannot be made. Further, clause (i) of the Explanation to sub clause (zzzza) of sub-s.(105) of s.65 distinctly refers to transfer of goods in any such contract to mean such goods leviable to tax as a sale of goods. Such leviability by itself may independently attract tax liability under tlie relevant Sales Tax statutes. Therefore, from these provisions under the Service Tax Act, it cannot be s.aid that manufacture, supply and installation of a lift is a 'works contract'. Besides, sub-clause (zzzza) of sub-s. (105) of s.65 came to be introduced under the Finance Act of 2007, which came into force w.e.f. 11.05.2007. [para 84- 85] [1038-D; 1039-E-G; 1040-A-B] F Income Tax Officer, Tuticorin vs. T.S. Oevinatha Nadar AIR 1968 SC 623- relied on. Cape Brand Syndicate vs. Inland Revenue Commissioner, 1921-1 KB 64 - referred to. G 3.5. It should also be noted that ss. 65(29), 65(39a) and 65(105) (zzd) have nothing to do with manufacture and supply which is actually the activity of the petitioner. It is regarding the erection/commissioning/installation simpliciter, even if the activities regarding lift or escalator H is independently carried out by an Agency. On the basis

932 · SUPREME COURT REPORTS [2014] 5 S.C.R.

A of ss.65 (29), 65 (39a) and 65 (105) (zzd), the contract cannot be construed as a works contract. Therefore, on the ground of any liability being cast on the petitioner under the provisions of the Service Tax Act, it will be wrong to hold that the petitioner cannot be called upon to comply with the provisions relating to Sales Tax. [para 85] [1040-B-E] 3.6. In the case on hand, the payment has really nothing to do with the erection and installation. It has also got no relation to the delivery of the lift, either in its full form or in any semi-installed condition. The· contractual terms between the petitioner and its purchaser have no relation to any service to be performed by the petitioner by way of the agreed terms of the contract. In any event, in the instant case, the terms of the contract are not persuasive enough to call it a 'works contract'. The manufacture, supply and installation of lift/elevator by the petitioner would constitute a 'sale' and not 'works contract', having regard to the specific terms of the contract placed before this Court..[para 93-95] [1043-E- E F; 1046-E] . State of Andhra Pradesh vs. Kone Elevators (India) Pvt. Ltd. 2005 (2) SCR 152 = (2005) 3 SCC 389 - affirmed. State of Madras vs. Mis. Gannon Dunkerley and Co. (Madras) Ltd., 1959 SCR 379 =AIR 1958 SC 560; Hindustan F Shipyard Ltd. vs. State of Andhra Pradesh, 2000 (1) Suppl. SCR 592 = (2000) 6 SCC 579 - referred to. 4.1 In order to invoke Art. 366 (29A)(b), it will have to be found out whether a contract will fall within the four G corners of the expression 'works contract'. Further, the transactions have to be examined individually with. particular reference to the essential ingredients contained therein to find out as to whether such ingredients would lead to a conclusion of a 'sale' as defined .in the Sale of Goods Act, 1930 or not. In the event of such element of H

p. 933 Copy page pinpoint

& ORS. 'sale' not being present, then alone Art. 366(29A)(b) would get attracted for the purpose of applying the principle of deemed sale. While applying Art. 366(29A)(b), it should not be limited to a contract for labour and service only. If a contract can be ascertained based on its definite terms and can be held to be a contract for supply of goods, then in the course of implementation of the said contract, namely, supply of the goods certain services are to be rendered, it will have to be held that insig"ifjcant services rendered alone, cannot be the basis to hold the entire contract to be a 'works contract'. [para 105-107] [1050-E; c 1051-B-C; 1052-D-F] Bharat Sanchar Nigam Ltd. and Another vs. Union of = India and others 2006 (2) SCR 823 (2006) 3 SCC 1 Larsen & Toubro Ltd. vs. State of Karnataka 2013 (12) SCALE 77 - referred to. D 4.2. In every contract what is to be seen in the first instance is the relevant terms of the contract and finding out as to whether the essential ingredients of those terms would lead the court to hold whether the element of 'sale' that would fall within the definition of 'sale' under the Sale E of Goods Act is present. In this event, the question of construing the said contract as a 'works contract' covered by Art. 366(29A) would not arise. In the instant case, by virtue of the ess.ential ingredients of the contract, what was agreed between the parties was only sale of the lift and for that purpose the petitioner also agreed to carry out the installation exercise. hi fact, when the very contract itself was for supply of lift to its purchaser, simply because there was some work element involved for the purpose of installation of the lift, it cannot be held that the whole contract is a 'works contract' falling .within the ambit of Art. 366(29A). Having regard to the essential ingredients of the contractual terms, the supply of lift by the petitioner to its purchaser cannot be held as a 'works contract' and, as such Art. 366(29A)(b) cannot be invoked H

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A to the case on hand. [para 109,111 and 113] [1054-A-C; 1055-B-C; 1056-D] Mis. Patnaik and Company vs. State of Orissa 1965 SCR 782 =AIR 1965 SC 1655 - relied on. Associated Cement Companies Ltd. vs. Commissioner 8 of Customs 2001 (1) SCR 608 = (2001) 4 SCC 593 - held inapplicable. 4.3. The supply of lift by the petitioner to its purchaser satisfies the definition of 'sale' as defined under the Sale c of Goods Act, and, therefore, the question of deemed sale does not arise. [para 114] [1056-E] 4.4. In the instant case, the contract was put into writing containing various clauses and conditions which were elaborate and definite to the effect that the petitioner D should manufacture, supply and then erect a product, namely, the lift. The contract is definite and the terms of the contract sufficiently demonstrate that it is one for supply of lift and not a contract for works. It can be aptly held that the contract in the instant case is nothing but a E contract for 'sale' and not a 'works contract'. By virtue of the terms, the manufacture, supply and installation of a lift is a contract for 'sale' and not a 'works contract'. [para 116,121 and 123] [1057-F; 1061-G] Mis T. V. Sundram Iyengar & Sons vs. The State of F Madras (1975) 3 SCC 425; The Commissioner of Commercial Taxes Mysore, Bangalore vs. Hindustan Aeronautics Ltd. (1972) 1 SCC 395; and Union of India vs. The Central India Machinery Manufacturing Company Ltd. = and others 1977 (3) SCR 437 (1977) 2 sec 847 - relied on. State of Madras vs. Richardson Cruddas Ltd. [1968] 21 STC 245- held inapplicable 4.5. Based on the contractual terms as between the petitioner and its purchaser that the value of the lift upto

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A {fistingl.iish a contract of sale from a contract of work and labour. It has to be necessarily examined based on the terms agreed between the parties as to what is the intention of the parties. Therefore, ~ince it is found that the contract in the instant case is a contract for sale, it B cannot be held to be a 'works contract'. [para 138] [1070- F-H] . Govt. of Andhra Pradesh vs. Guntur Tobaccos Ltd. 1965 SCR 167 =AIR 1965 SC 1396 - relied on C Commissioner of Sales Tax, Gujarat vs. Mis. Sabarmati Reti Udyog Sahakari Mandali Ltd. 1976 Suppl. SCR 158 = (1976) 3 SCC 592 - referred to. 4.8. Even after the 46th A11endment, if Art. 366 (29A)(b) of the Constitution is to be invoked, as a o n·ecess"ry concomitant, it must be shown that the terms of the contract would lead to a conclusion that it is a 'works contract'. Unless a contract is proved to be a 'works contract' by virtue of the terms agreed as between the parties, invocation of Art. 366 (29A)(b) cannot be made. Alternatively, if the terms of the contract disclose or lead to a definite conclusion that it is not a 'works contract', but one of outright sale, the same will have to be declared as a 'sale' attracting the provisions of the relevant sales tax enactments. Therefore, having applied the relevant principles to the case on hand, and having regard to the nature of the terms of the contract displayed, it will have to be held that the manufacture, supply and installation of lifts/elevators comes under the definition of 'sale' and not 'works contract'. [para 140] [1071-G-H; G 1072-A-B] State of Andhra Pradesh vs. Kone Elevators (India) Pvt. Ltd. 2005 (2) SCR 152 = (2005) 3 SCC 389 - affirmed. K. Raheja Development Corporation vs. State of Karnataka 2005 (3) SCR 1210 = 2005 (5) SCC 162; State of H Rajasthan & Anr. vs. Man Industrial Corporation Ltd.[1969]

KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 937 · & ORS. 24 STC 349, State of Rajasthan vs. Nenu Ram, [1970) 26 A STC 268; Mis. Vanguard Rolling Shutters and Steel Works vs. Commissioner of Sales Tax, 1977 (3) SCR 165 = (1977) 2 sec 250 - cited. Case Law Reference B Per Dipak Misra, J. [2005]SCR 152 affirmed para 2 1969 (3) SCR 505 referred to para 2 (1970) 26 STC 268 (SC) cited para 2 c 1977 (3) SCR 165 cited para 2 2006 (2) SCR 823 referred to para 5 (2014) 1 sec 108 affirmed para 5 (1969) 24 STC 525 (Born) approved para 7 D 1989 (2) SCR 320 relied on para 8 (1965) 2 SCR 782 distinguished Para 9 1975 (2) SCR 372 cited Para 9 1977 (3) SCR 437 cited Para 9 E (1953) 1 All ER 15 cited Para 9 (1944) 1 All ER 618 cited Para 9 2003 (9) sec 133 cited Para 10 1988 (3) Suppl. SCR 1 referred to para 10 F

1989 (3) SCR 1017 referred to para 10 2001 (2) Suppl. SCR 559 referred to para 10 2007 (3) SCR 476 cited para 10 G (1922) 1 KB 343 referred to . para 10 1979 (1) SCR 644 referred to para 10 1979 (2) SCR 621 referred to para 10 2010 (4) SCR 476 cited para 10 H

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A 58 L.Ed. 1166 cited para 10 1997 (6) Suppl. SCR 431 referred to para 10 1989 ( 2 ) SCR 918 referred to para 12 2000 (1) Suppl. SCR 592 referred to para 14 B 1959 SCR 379 referred to para 16 1962 SCR 81 referred to para 17 1967 SCR 543 referred to para 19 (1968) 21 STC 245 (SC) referred to para 20 c (1843) 11 M & W. 243 referred to para 20 1972 (2) SCR 937 referred to para 22 1976 Suppl. SCR 131 referred to para 23

D 1910 (2) sec 287 referred to para 25 1984 (2) SCR 267 referred to para 26 1992 (3) Suppl. SCR 103 followed para 31 2001 (1) SCR 608 referred to para 34

E 2005 (3) SCR 1210 referred to para 36 2007 (8) SCR 927 referred to para 37 (Per Fakkir Mohamed Ibrahim Kalifulla, J.) 2005 (2) SCR 152 affirmed para 3 F 1969] 24 STC 349 referred to para 3 [1970] 26 STC 268 referred to para 3 1977 ( 3 ) SCR 165 referred to para 3 2000 (1) Suppl. SCR 592 referred to para 4 G 2013 (12) SCALE 77 held inapplicable para 6 1965 SCR 782 relied on para 7 (1972) 1 sec 395 referred to para 7 959 SCR 379 referred to para 7 H

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& ORS. [1969] 24 STC 525 held para 34 ~ inapplicable [1968] 21 STC 245 held para 37 inapplicable (1981) ELT 720 held para 38 B inapplicable (1975) 3 sec 425 relied on para 42 1977 (3) SCR 437 relied on para 42 2006 (2) SCR 823 referred to para 46 c (1875) LR 10 CP 271 cited para·46 (1970) 2 sec 287 referred to. para 50 2010 (4) SCR 476 1921-1 KB 64 referred to referred to .. para 50 para 50 D AIR 1968 SC 623 relied on para 84 2005 (3) SCR 1210 ·cited para 96 2001 (1) SCR 608 held para 109 inapplicable E 1989 (2) SCR 320 held para 134 inapplicable 19761-(0) Suppl. SCR 158 referred to Para 13 7 1965.SCR 167 relied on para 139 F CIVIL ORIGINAL JURISDICTION : Writ Petition (CIVIL) No(s). 232 of 2005. Under Article 32 of the Constitution of India. WITH G Writ Petition (Civil) Nos. 298/2005, 487/2005, 528/2005, 67/ 2006, 511/2006, 75/2007, 519/2008, 531/2008, 548/2008, 569/2008, 186/2009, 23/2010, 62/2010, 232/2010, 279/2010, 377/2010, 112/2011, 137/2011, 181/2011, 207/2011, 278/ 2011, 243/2011, 372/2011, 398/2011, 381/2011, 468/2011, H-'

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A. 547/2011, 107/2012, 125/2012, 196/2012, 263/2012, 404/ 2012, 567/2012, 145/2013, 241/2013, 454/2013, 404/2013, 723/2013, 440/2012, 441/2012, 156/2013, 533/2013, 403/ 2012, 824/2013, 428/2009, 1046/2013, 1047/2013, 1048/ 2013, 1049/2013, 1050/2013, 1051/2013, ·1052/2013, 1098/ B 2013 and Civil Appeal Nos. 5116-5121, 5135-5141, 5142- 5147, 5152-5153, 5154, 5156, 5157, 5159-5160, 5162-5164, 5165, 5166, 5167-5168, 5170-5172, 5174, 5175, 5178, 5179, 5180-5192, 5193, 5195-5206 of 2014 and 6285/2010. A. Mariarputham and Darius Khambata, AGs, P.P. C Malhotra, ASG, Harish N. Salve, R.L. Ramani, Shyam Divan, Rakesh Dwivedi, K. Radhakrishnan, Atul Chetalay, R. Venkataramani, Sunil Kumar, P.N. Misra, K.N. Bhatt, Manjit Singh, Krishna Sharma, Dr. Manish Singhvi, Suryanarayana .Singh, AAGs, K.K. Mani, T. Archana, B. Raveendran, Abhishek D Krishna, Anand Padmanathan .. Rohan Shah, Rohit Jain, Sonu Bhatnagar, Monish Panda, Tarun Jain, Somnath Shukla, Kshitiz Karjee, Praveen Kumar, Chirag M. Shroff, Abhishek Singh, Priyanka Rai, s.· Nanda Kumar, R. Satish Kumar, P. Dhayanand, Parivesh Singh, Shiva Kumar, Naresh Kumar, S. E Gowthaman, Aarohi Bhalla, Supriya Deshpande, Subodh S. Patil, Anil Katiyar, Kirti Renu Mishra, Apurva Upmanyu, Chinmoy Khaladkar, Anirudha P. Mayee, Charudatta Mahindrakar, Apoorva Kurup, Binu Tamta, Arijit Prasad, Yasin Rouf, Yomaya Agnihotri, B. Krishna Prasad, D.S. Mahra, Asha F Gopalan Nair, Yomaya Agnihotri, V. Vijayalakshmi, B. Balaji, R. Rakesh Sharma, Selvin Raja, Anand S., Neelam Singh, Shodhan Babu, Yashraj Singh, C.K. Sucharita, Yashraj Singh Bundela, Gopal Singh, Chandan Kumar, Manish Kumar, Shashank Kumar, Anubha Gupta (for Mfs. Parekh & Co.), Ratan Kr. Choudhary, V. G. Pragasam, S.J. Aristotle, Prabhu G Ramasubramanian, Bina Madhavan, Aruna Mathur, Yusuf, (for Mis. Arputham Aruna & Co.), Ravi P. Mehrotra, Ashutosh Kr. Sharma, Vibhu Tiwari, Abhinav Kumar Malik, Gunnam Venkateswara Rao, Kamlendra Mishra, Anip Sahthey, Saakaar Sardana, Mohit Paul, Preetesh, Hemantika Wahi, H

KONE ELEVATOR INDIA PVT. LTD. v. STATE T.N. & 941 ORS. Sangeeta Singh, Tarjit Singh, Vinay Kuhar, Vikas Sharma, A Nupur Choudhary, Kamal Mohan Gupta, Navnit Kumar (for M/ s. Corporate Law Group}, Mishra Saurabh, Naveen Sharma, V.N. Raghupathy, Anitha Shenoy, Neha Singh, Visruti Vijay, Anantha Krishna Bhat, Ananth Naryana M.G., Parikshit P. Agadi, lrshad, Anirudha P. Mayee, Apoorva Kurup, Charudatta B Mahindrakar, Rachna Srivastava, Utkarsh Sharma, Jogy Scaria, Mohanprasad Meharia, Sanjay R. Hegde, Avijit Bhattacharjee, B.S. Banthia, Adarsh Upadhyay, milind Kumar, Pragati Neekhra, R. Nedumaran, Ramesh Babu M.R., .T.V. George, G.N. Reddy, Himinder Lal, Sunil Fernandes, Anil c, Katiyar and R. Sathish for the appearing parties. The Judgment and Order of the Court was delivered by DIPAK MISRA, J. [FOR R.M. LODHA, C.J., A.K. PATNAIK, SUDHANSU MUKHOPADHAYA, JJ. AND D HIMSELF]

1. Leave granted in all the special leave petitions.

2. By an order dated 13.2.2008 in Kone Elevator India F?rivate Limited v. State of Tamil Nadu and others 1, a three- Judge Bench of this Court, while dealing with the writ petition E preferred by Kone Elevator India Pvt. Ltd. along with Special Leave Petitions, noted that 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", and a three-Judge Bench. in St::,i1::1 of A.P. v. Kone F Elevators (India) Ltd. 2, had not noticed the decisions rendered by this Court in State of Rajasthan v. Man Industrial Corporation Ltd. 3, State of Rajasthan and others v. Nenu Ram 4 and Vanguard Rolling Shutters and Steel Works v. Commissioner of Sa/es Tax 5 and perceiving the manifest G discord, thought it appropriate that the controversy should be resolved by the larger Bench. Thereafter, keeping in view the

1. (2010) 14 sec 788.

2. (2005) 3 sec 389.

3. (1969) 1 sec 567. H

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A commonality of the controversy in Civil Appeal No. 6285 of 2010 and other Special Leave Petitions, they were tagged with the originally referred matters. Thus, the matters are before us.

3. 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". Needless to say, in case of the former, the entire sale consideration would be taxable under the sales tax or value added tax enactments of the State legislatures, whereas in the latter case, the consideration payable or paid for the labour and service element would have to be excluded from the total consideration received and sales tax or value added tax would be charged on the balance amount. -

4. Keeping in mind the said spinal issue, we think it apposite to briefly refer to the facts as adumbrated in the writ petition preferred by Kone Elevator India Pvt. Ltd. The petitioner is engaged in the manufacture, supply and installation of lifts involving civil construction. For the Assessment Year 1995-96, the Sales Tax Appellate Tribunal, Andhra Pradesh, considering the case of the petitioner, opined that the nature of work is a "works contract", for the erection and commissioning of lift cannot be treated as "sale". On a revision being filed, the High Court of Andhra Pradesh affirmed the view of the tribunal and dismissed the Tax Case (Revision) filed by the Revenue. F Grieved by the decision of the High Court, the State of Andhra Pradesh preferred special leave petition wherein leave was granted and the matter was registered as Civil Appeal No. 6585 of 1999 and by judgment dated 17.2.2005 in Kone Elevators (supra), the view of the High Court was overturned. G After the pronouncement in the said case, the State Government called upon the petitioner to submit returns treating the transaction as sale. Similarly, in some other States,

4. (1970) 26 STC 268 (SC). H 5'. (1977) 2 sec 2so.

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& ORS. [DIPAK MISRA, J.] proceedings were initiated proposing to reopen the assessments that had already been closed treating the transaction as sale. The said situation compelled the petitioner to prefer the petition under Article 32 of the Constitution. As far as others are concerned, they have preferred the writ petitions or appeals by special leave either challenging the show cause notices or assessment orders passed by the assessing officers or affirmation thereof or against the interim orders passed by the High Court requiring the assessee to deposit certain sum against the demanded amount. That apart, in certain cases, appeals have been preferred assailing the original assessment orders or affirmation thereof on the basis of the judgment in Kone Elevators (supra).

5. Mr. Harish Salve, learned senior counsel for the petitioners, has contended that prior to the decision of this Court in Bharat Sanchar Nigam Ltd. and another v. Union of D India and others 6, which has been further explained in Larsen and Toubro Limited and another v. State of Karnataka and another7, the law as understood was (a) where a contract was divisible by itself, then the element of sale would be taxed as an ordinary sale of goods, irrespective of the element of service; (b) where a contract was for the supply of goods, and for rendition of services, if the pre-dominant intention of the parties was to supply goods, the element of service would be ignored and the entirety of the contract consideration would be treated as the price of goods supplied an_d the tax imposed accordingly; and (c) as the law did not provide for dividing, by a legal fiction, a contract of such a nature into a contract for goods and a contract for services, the goods in which property passed from the contractor to the owner could not be brought to tax under the law of sales tax. It is assiduously urged by Mr. G Salve that the "predominant intention test" is no longer relevant and after the decision in Larsen and Toubro (supra), supply

6. (2006) 3 sec 1 · · 7. (2014)1 sec 10s. H

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A and installation of lift cannot be treated to be a contract for sale. It is argued that a lift comprises of components or parts [goods] like lift car, motors, ropes, rails, etc. and each of them has its own identity prior to installation and they are assembledfinstalled to create the working mechanism called lift. Learned senior B counsel would contend that the installation of these components! parts with immense skill is rendition of service, for without installation in the building, there is no lift.

6. Mr. Salve, learned senior counsel, has also referred to the Bombay Lifts Act, 1939, the Bombay Lifts Rules, 1958 and C Bombay Lifts (Amendment) Rules, 2010. He has referred to the Preamble of the Act which stipulates that an Act has been 1 enacted to provide for the regulation of the construction, maintenance and safe working of certain classes of lifts and all machinery and apparatus pertaining thereto in the State of D Bombay. The State Act applies to the whole of Maharashtra. He has drawn our attention to the dictionary clause of "lift" as has been defined in clause 3(c) to mean a "hoisting mechanism" equipped with a car which moves in a substantially vertical direction, is worked by power and is designed to carry passengers or goods or both; and "lift installation" which includes the lift car, the lift way, the lift way enclosure and the . operating mechanism of the lift and all ropes, cables, wires and plant, directly connected with the operation of the lift. He has also placed reliance on Section 4 which deals with permission to erect a lift, Section 5 that deals with licence to use a lift and Section 7 which provides a lift not to be operated without a licence. Learned senior counsel has also drawn our attention to the various rules that deal with many a technical aspect and the terms on which lift shall work and what requirements are to be carried out by a licencee under the Act. In essence, the submission is that the manufacture, supply and the installation are controlled by the statutory provisions under an enactment of the legislature and also the rules made in consonance with the Act which would reflect that immense skill-is required for such installation and the separate parts of the lift are not sold

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& ORS. [DIPAK MISRA, J.] iike goods, but it only becomes operational after it is installed, A 1djusted, tested and commissioned in a building.

7. Mr. Khambatta, learned Advocate General, appearing for the State of Maharashtra, submitted that in the case of sale and installation of a lift or elevator, the contract would include 8 the obligation to install the lift or to undertake any se~ces in ielation to the lift and these elements of value need lo--b~ deducted while taxing the sale of goods involved in such a contract. It is his submission that in a given case, there can be a contract which is exclusively for sale of lift, i.e., for sale of C goods which does not include any labour or service element . at all where the lift is bought from a manufacturer but a separate contract for installation is .entered into with an independent engineering contractor. Learned Advocate General urged that such an installation by way of contract is permissible under the Bombay Lifts Act, 1939 read with the Bombay Lifts Rules, D

1958. It is urged by him that prior to the decision in Kone Elevators case, the State of Maharashtra had treated contracts for sale and installation of lifts as "works contract" as per the decision of the High Court in Otis Elevator Company (India) Ltd. v. The State of Maharashtra 8 . He has copiously referred to the rule position which is prevalent in the State of Maharashtra. He has brought on record a Trade Circular dated 11.11.2013 to show that from 1.4.2006, the decision in Kone Elevators (supra) has been followed in the State of Maharashtra and it has adjusted the position in accordance with the said authority and the State having adjusted its position to the law rendered by the three-Judge Bench, in case the authority in Kone Elevators (supra) is overruled, it should be given prospective effect. G

8. Mr. K.N. Bhat, learned senior counsel for the State of Karnataka, has submitted that the contract of manufacture, supply and installation of lifts comprises a works contract, for a. (1969) 24 sec (Born). H

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A the expression "works contract" is not a term of art as has been explained in Builders' Association of India and others v. Union of India and others9 as well as in Larsen and Toubro (supra). It is put forth by Mr. Bhat that lifts are assembled and manufactured to suit the requirement in a particular building and are not something sold out of shelf and, in fact, the value of goods and the cost of the components used in the manufacturing and installation of a lift are subject to taxation while the element of labour and service involved cannot be treated as goods. In essence, the submission of Mr. Bhat is that taking into consideration the multifarious activities involved in the installation of the lift, it has to be construed as a "works contract" and the decision in Kone Elevators (supra) does not lay down the law correctly.

9. Mr. Rakesh Dwivedi, learned senior counsel appearing for the State of Orissa, has referred to the terms of the quotation, the confirmation letter, the letter of approval, the preparatory erection work or civil work which are to be carried out by the customer at its own cost, the specific mode of payment and the nature of supply and, on that basis, contended that the contract was for sale and supply of a lift to the customer for a monetary consideration. It is urged by him that a part of manufacture is carried out at the project site of the customer and the skill and labour deployed in the installation or the work done is merely a component I of the manufacturing process and, as a matter of fact, the elevator is supplied to the customer only after its erection/installation at the site. It is further contended by him that where a manufacturer of lift first manufactures components and then completes the manufacture of the lift at the site and retains ownership in the components as property while producing the completed lift, it is a case of pure manufacture. It is contended by him that the phraseology used in the contract is not decisive because it is the economic reality which is decisive, for the installation is a part of the

H 9. (1989) 2 sec 645.

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& ORS. [DIPAK MISRA, J.] manufacturing process resulting in the emergence of the product A of elevator which is contracted for. Learned senior counsel would contend that it has to be construed as an elevator bought and sold as such. In this regard, he has drawn inspiration from the authorities in Patnaik & Co. v. State of Orissa 10 , T. V. Sundram Iyengar & Sons v. State of Madras 11 , Union of India 8 v. Central India Machinery Manufacturing Company Ltd. and others 12, J. Marcel (Furrier) Ltd. v. Tapper13 and Love v. Norman Wright (Builders) Ltd. 14 •

10. Mr. Dwivedi has also contended that even if high degree of skill and craftsmanship goes into installation which C ·is a part of the manufacturing process, it is not more than erecting an article for sale on the basis of a special order. For the aforesaid-proposition, he has placed reliance on J. Marcel (Furrier) Ltd. (supra)·. ll is his submission that emphasis on technology and skill including labour and also the instructions D in the manual are of no consequence as all are insegregable facets of the manufacturing process. It is proponed by him that erection, commissioning and assembling of parts and components amount to manufacture as has been laid down by this Court in MIL India Ltd. v. Commissioner of Central Excise,. E Noida 15 , Name Tulaman v. Collector of Central Excise, Hyderabad 16, Titan Medical Systems (P) Ltd. v. Collector of Customs, New Oelhi1 7, Collector of Central Excise, Calcutta- · II v. Eastend Papers Industries Ltd 18• and Aspinwall & Co. Ltd. v. Commissioner of Income Tax, Ernakulam 19 . He has also F placed reliance on Underwood Limited v. Burgh Castle Brick and Cement Syndicate 20 wherein the Kings Bench has ruled that until the railway engine was reassembled and put on rail, it could not be said that the goods were delivered as per the G

10. (1965) 2 SCR 782.

11. (1975) 3 sec 424.

12. (1977) 2 sec 847.

13. (1953) 1 All ER 15.

14. (1944) 1 All ER 618. H

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A contract. Commenting on the attachment to immovable property as permanent affixation, it is put forth by him that the decisions in Sentinel Rolling Shutters & Engineering Company (P) Ltd. v. Commissioner of Sales Tax 21 , Ram Singh & Sons Engineering Works v. Commissioner of Sales Tax, U.P. 22 , 8 Man Industrial Corporation (S\Jpra) and Van.guard Rolling Shutters & Steel Works (supra) were rendered prior to the amendment of the Constitution and hence, they stand on a different footing as they were fundamentally dealing with indivisible contracts. Elaborating an the nature of affixation, it is urged by him that only the guide rails and the frame of the entry/exit doors are attached to the immovable property by nuts and bolts and the motor is also placed on the beam with the help of nuts and bolts. The sheave is attached to the motor and it enables the steel rope to move. The steel rope is attached to one side of the cabin car and on the other side to the counter weight. These parts are aligned so that the cabin car and the counter weight move up and down in opposite directions. Therefore, contends the learned senior counsel, the lift is only partially attached to the building and the remaining major portions of the components are constantly mobile. In fact, people buy lifts only with the object of movability and the lifts are advertised as transport systems. The learned senior counsel would further submit that if railway engines and coaches are goods notwithstanding motion on rail alone which is fixed to the earth by nuts and bolts, the elevators will also be goods notwithstanding the attachment of guide rails. For the aforesaid

15. c2007) 3 sec 533.

16. (1989) 1 sec 172.

G 17. (2003) 9 sec 133.

18. (1989) 4 sec 244

19. c2001) 7 7 sec 525.

21. (1978) 4 sec 260.

H 22. (1979) 1 sec 487

p. 949 Copy page pinpoint

& ORS. [DIPAK MISRA, J.] purpose, he has drawn inspiration from Sirpur Papers Mills Ltd. A 'v. Collector of Central Excise, Hyderabad23, Commissioner of Central Excise, Ahmedabad v. Solid & Correct Engineering of Works and others24 and Detroit Steel Cooperage Company v. Sistersville Brewing Company25 • B

11. Mr. R. Venkataramani, learned senior counsel appearing for the States of Tamil Nadu and Andhra Pradesh, has contended that the primary intention behind the demand of installation of a lift is the intention to have the lift as a system and, therefore, the work of installation merely fulfills the erection C and functional part of the system. The service or work element may be the means to render a set of goods constituting a unit to be fit for use and, in fact, the act of installation is to bring the goods to use and hence, it is the culmination of the act of sale. The learned senior counsel has put forth that the contract involved would come in the category of contracts which can be 0 described as contracts where goods, in any form whatsoever, are intended for transfer but the completion of the transfer may involve certain set of activities, by whatever name called, for the purposes of securing the use or consumption of such goods in question and to that class of contracts, the principle of E "deliverable state" as used in Section 21 of the Sale of Goods Act, 1930 would be attracted and, therefore, such a contract would be a pure contract for sale of goods. It is emphasized by him that the threshold question to be put in every case is whether the purchaser's true object is to obtain an identifiable product or goods or the intention is to utilize the services of or works from a person for the purposes of realizing an end product which may emerge only for the reason of the execution of the work by rendering of the services in question. Applying the said principle to a lift, it is canvassed by him that a lift or an elevator is an identifiable good which is transferred to the

23. (1998) 1 sec 400.

24. (201 o) 5 sec 122.

25. 58 L.Ed. 166.. H

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A purchaser as such and solely because certain amount of labour or service is required for the purpose of putting together all the components of the lift at the site to bring it to its usable state, the same does not make a difference as to the nature of the contract and it cannot be regarded as a works contract. B

12. Ms. Hemantika Wahi and Mr. Preetesh Kumar, learned counsel for the State of Gujarat, while adopting the submissions of the learned senior counsel for the State of Orissa, have submitted· that the traditional tests for determining whether a C contract is a works contract or not would continue to apply. It is urged that the sale of goods involved in the execution of a works contract is quite distinct from the works performed while executing a sale of goods contract. It is also put forth that it would come within the competence of the State legislature being a measure of tax and for that purpose, reliance has been placed on Federation of Hotel and Restaurant Association of India v. Union of India and others26 • Be it noted, the learned counsel for the State, while placing reliance on Bharat Sanchar (supra), have also asserted that the dominant nature test or other test approved in Larsen and Toubro (supra) are still relevant. It is apt to note here that in the written note of submission, certain lines from para 45 of Bharat Sanchar (supra) have been reproduced. Relying on the same, it is contended that the "dominant nature test" is still available.

F . 13. Dr. Manish Singhvi, learned counsel appearing for the State of Rajasthan, has submitted that the decision rendered in Vanguard Rolling Shutters & Steel Works (supra), Man Industrial Corporation Ltd. (supra) and Nenu Ram (supra) do not lay down the correct law because the underlying reason G accorded in those cases is that if a particular item is to be fixed in the immovable property, then the property passes on as an immovable property and, therefore, cannot be construed as a sale. Reliance has been placed on the Constitution Bench

H 26. (1989) 3 sec 634.

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& ORS. [DIPAK MISRA, J.] decisions in Patnaik & Co. (supra) and Hindustan Shipyard A Ltd. v. State of AP. 27•

14. Mr. P.N. Mishra, learned senior counsel appearing for the State of Haryana, has supported the law laid down in Kone Elevators (supra) and, on that base, contended that supply 8 and installation of the lift is a contract for sale and not a works · contract. For the aforesaid purpose, he has laid emphasis on the specification laid down in the terms and conditions of the contract in which the customer is obliged to undertake certain work of civil construction. He has brought on record an order C of assessment for the assessment year 2009-2010 from which it is quite vivid that the assessing officer has treated the transaction as a sale adopting the principle stated in Kone Elevators case. Learned counsel for the State has brought to our notice a Gazette Notification providing 15% tax on labour, service and other like charges as percentage of total value of ,,p the contract to show that it has been so done keeping in view the nature of composite contract. '

15. Mr. P.P. Malhotra, learned Additional Solicitor General of India appearing for Union of India, has submitted that parts of the lift are assembled at the site in accordance with its design and requirement of the building which may include the floor levels and the lift has to open on different floors or otherwise depending upon the requirement. It has to synchronize with the building and each door has to open on the level of each floor and hence, by no stretch of imagination, it can be treated as a manufacture or mere supply but cumulatively considered, it is a works contract and, more so, when the contract is a composite or turnkey contract. Mr.· · Malhotra would further submit that it is not a mere case of sale and according to the expanded definition of tax on sale, "tax" is leviable only on the transfer of property in goods, wh~ther in goods or in some other form, involved in the execution of work

21. (2000) 6 sec 579. H

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A and no sales tax is leviable on the execution of works contract. Thus, the stand of the Union of India is that supply and installation of lift is not a contract for sale but a works contract.

16. To appreciate the controversy in the backdrop of the 8 rivalised submissions, it is necessary to delve into the genesis ot the law in respect of "works contract" and thereafter to dwell upon how far the principles pertaining to "works contract" would govern the manufacture, supply and installation of lifts. In this context, it is seemly to appreciate the legal position as to how the impost of sales tax on "works contract" was treated prior to the insertion of Clause (29A) in Article 366 of the Constitution by the Constitution (Forty-sixth Amendment) Act, 1982 with effect from 1.3.1983 and how this court has dealt with the said facet after the constitutional amendment that changed the concept of levy of sales tax on "works contract". For the aforesaid purpose, chronological recapitulation is imperative. In State of Madras v. Gannon Dunkerley & Co., (Madras) Ltd. 28 , the assessee faced a levy in respect of goods sold in relation to works contract under the Madras General Sales Tax Act, 1939 as amended by the Madras General Sales Tax E (Amendment) Act 25 of 1947 wherein certain new provisions were incorporated and one such provision, namely, Section 2(i) defined "works contract" to mean "any agreement for carrying out for cash or for deferred payment or other valuable consideration, the construction, fitting out, improvement or repair of any building, road, bridge or other immoveable property or the fitting out, improvement or repair of any movable property". In pursuance of the said provision, the rules were amended and the assessment was framed. When the matter travelled to the Constitution Bench of this Court, it was contended by the assessee 'that nothing could be levied that was received by the assessee from the persons for whose ben·efit it had constructed the buildings. On behalf of the Revenue, it was urged that once there was an agreement

H 28. AIR 1958 SC 560.

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& ORS. [DIPAK'MISRA, J.] between the parties and in the carrying out of that agreement there was transfer of title in movables belonging to one person to another for consideration, there would be a "sale". Repelling the said submission, it was held that if the words "sale of goods" were to be interpreted in their legal sense, that sense could only be what it was in the law relating to sale of goods. It was observed that the ratio of the rule of interpretation that words of legal import occurring in a statute should be construed in their legal sense is that those words have, in law, acquired a definite and precise sense, and that, accordingly, the legislature must be taken to have intended that they should be understood in c that sense and in interpreting an expression used in a legal sense, the requirement was to ascertain the precise connotation which it possesses in law because both under the common law and the statute law relating to sale of goods in England and in India, to constitute a transaction of sale, there 0 should be an agreement, express or implied, relating to goods to be completed by passing of title in those goods. The essence of the concept that both the agreement and the sale should relate to the same subject-matter was highlighted and it was opined that under the law, there could not be an agreement relating to one kind of property and a ~ale as regards another. E The Constitution Bench further held that on the true interpretation of the expression "sale of go'ods", there must be an agreement between the parties for the sale of the very goods in which eventually property passes and in a building contract, the agreement between the parties being to the effect that the contractor should construct a building according to the specifications contained in the agreement, and in consideration therefor receive payment as provided therein, there was neither a contract to sell the materials used in the construction nor did · the property pass therein as movables and, therefore, it was impossible to maintain that there was implicit in a building contract a sale of materials as understood in law. Eventually,· the Court summed up the conclusion by stating that the expression "sale of goods" in Entry 48 is a nomen juris, its H

p. 954 Copy page pinpoint

A essential ingredients being an agr~ement to sell movables for a price and property passing therein p,ursuant to that agreement and in a building contract which was one, entire and indivisible, there was no sale of goods, and it, was not within the competence of the Provincial Legislature under Entry 48 to ·B impose a tax on the supply of the materials used in such a contract treating it as a sale.

17. In Carl Still G.m.b.H. & Another v. State of Bihar and others29 , the majority, interpreting the nature Of the contract which related to assembling and installing machinery, plant and accessories for a coke-oven battery and by-products plant, opined that the price was agreed for the execution of the works and there was no agreement for sale of material~ as such by the appellant therein to the owner and, therefore, the agreement in question was an indivisible one for the construction of specified works for a lump sum and not a contract for sale of materials as such.

18. Patnaik & Co. (supra) related to a case of construction of bus bodies on a chassis and the builder of the bus bodies had taken the responsibility to bear the loss, if any, till the delivery of the chassis with bus bodies. The question arose whether the assessee was liable to pay sales tax under the Orissa Sales Tax Act, 1947 on the whole amount or entitled to deduction from its gross turnover in respect of the amount received from the State Government for building bodies on the chassis supplied by the Government. The majority decision observed that it was a case of fixing chattel on chattel and there was no .authority for the proposition that when a chattel was fixed on another chattel, there was no sale of goods. The decision in Gannon Dunkerley-/ (supra) was distinguished on the ground that it related to contract to construct a building and th_e property did not pass in the materials as movables but the property in the bus bodies passed as a movable property. Thus, it was not

H 29. AIR 1961 SC 1615.

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& ORS. [DIPAK MISRA, J.] one but sum total of several reasons which was the foundation A of the majority judgment in Patnaik & Co. (supra).

19. In the case of State of Gujarat v. Mis. Kai/ash Engineering Co. (Pvt.) Ltd. 30 , the issue was whel_her the construction of third class sleeper coaches by the respondent- 8 assessee on certain conditions amounted to a works contract or it was a sale under the said State enactment. This Court, taking into account all the terms of the contract and treating the same as one entire and indivisible contract for carrying out the works specified in full details in the agreement, and considering that it did not envisage either the sale of materials by the respondent to the Railway, or of the coach bodies as such, treated it as a works contract.

20. In The State of Madras v. Richardson & Cruddas 31 Ltd. , there was a postulate that a consolidated lump sum would be paid per ton for fabrication, supply and erection at site of all steelwork, and there was no provision under the contract for dissecting the value of the goods supplied and the value of the remuneration for the work and labour bestowed in the execution of the work and the predominant idea underlying the contract was bestowing of special skill and labour by the experienced engineers and mechanics of the respondent. Taking into consideration the said aspects and relying on the principles stated in Clark v. Butmei32 , the Court held that the contract was a works contract and not a contract for sale. F

21. in Man Industrial Corporation Ltd. (supra), which has been taken note of in the referral order, this Court treated the contract for providing and fixing four different types of windows of certain sizes according to "specifications, designs, drawings and instructions" set out in the contract as a contract for work G and labour and not a contract for sale, for 'fixing' the windows

30. AIR 1967 SC 547.

31. (1968) 21 STC 245 (SC).

32. (184311 M & W. 243. H

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A to the building was not incidental or subsidiary to the sale, but was an essential term of the contract. Similar view has been expressed in Nenu Ram (supra).

22. In The State of Punjab v. Mis. Associated Hotels of B India Ltd. 33 , the Constitution Bench, while dealing with the construction of a contract of work and labour on the one hand and contract for sale on the other, opined that the difficulty which the Courts have often to meet in construing a contract of work and labour, on the one hand, and a contract for sale, on the other, arises because the distinction between the two is very C often a fine one and it is particularly so when the contract is a composite one involving both a contract of work and labour and a contract of sale. The Court thereafter proceeded to state thus:

D "Nevertheless, the distinction between the two rests on a clear principle. A contract of sale is one whose main object is the transfer of property in, and the delivery of the possession of, a chattel as a chattel to the buyer. Where the principal object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract · is one of work and labour. The test is wtiether or not the work and labour bestowed and in anything that can pro1: ..1riy become the subject of sale; neither the ownership ot materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is in substance one for work and labour or one for the sale of a chattel 34 ." G Be it stated, in the said case, the respondent-company carried business as hoteliers and, as a part of its business, the company received guests to whom ., it furnished certain

33. (1972) 1 sec 472.

H 34. Halsbury's Laws of England 3'' Ed., Vol. 34, 6-7.

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& ORS. [DIPAK MISRA, J.] amenities. The Court ruled that the transaction between a A hotelier and a visitor was essentially one of contract of service and facilities provided at reasonable price.

23. In State of Gujarat (Commissioner of Sales Tax, Ahmadabad) v. Mis. Variety Body Builders35 , this Court, after 8 refefring to the passage from Halsbury's Laws of England, Third Edition, Volume 34, page 6, ruled thus: -

"47. It can be treated as well settled that there is no standard formula by which one can distinguish a contract of sale from a contract for work and labour. There may be many common features in both the contracts, some neutral in particular context, and yet certain clinching terms in a given case may fortify a conclusion one way or the other. It will depend upon the facts and circumstances of each case. The question is not always easy and has for all time vexed jurists all over."

24. In Vanguard Rolling Shutters and Stu: Works' case, the assessee manufactured rolling shutters according to specifications given by the parties and fixed the same at the premises of the customers. The assessee claimed that it was not liable to sales tax on the ground that the amount received by it represented the proceeds of works contract. When the matter travelled to the High Court, it opined that the contracts entered into by the assessee were not works contracts but contracts for supply of goods simpliciter and the assessee was, therefore, liable to pay sales tax. While reversing the decision of the High ·court, this Court took note of certain aspects, namely, that the amount from the owner of the premises was in lump sum without specifying as what part was meant for the material and the fabricated part and what part was meant for service or labour put in by the contractor; that the materials as supplied was not supplied by the owner so far as to pass as chattel simpliciter, but actually affixing to one immovable

35. (1976) 3 sec 500. H

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A property and after they were fixed and erected, they became permanent fixture so as to become an accretion to the immovable property; and that the operation to be done at the site could not be said to be merely incidental to the contract but was a fundamental part of the contract. In this backdrop, it was ruled that the contract in question was not a pure and simple sale of goods or materials as chattels but was a works contract.

25. In Ram Singh & Sons Engineering Works (supra), the assessee-manufacturer had entered into contracts for fabrication, supply and erection of overhead travelling cranes. Under the contract, it was required to design, fabricate and erect the machines at the customers' factories according to the specifications given by the customers. The Court followed the • principles laid down in Commissioner of Sales Tax, Madhya D Pradesh v. Purshottam Premji3 5, Sentinel Rolling Shutters & Engineering Co. (P) Ltd. (supra) and Man Industrial Corporation (supra) and treated it as works contract on the ground that the erection is a fundamental and integral part of the contract, because without it, the 3-motion electrical overhead r: travelling crane does not come into being. It was further observed that the manufacturer would undoubtedly be the owner of the component parts when he fabricated them, but at no stage does he become the owner of the 3-motion electrical overhead travelling crane as a unit so as to transfer the property in it to the custol'!.1er. Emphasis was laid on the fact that the 3- motion electrical overhead travelling crane comes into existence as a unit only when the component parts are fixed in position and erected at the site, but at that stage, it becomes the property of the customer because it is permanently embedded in the land belonging to the customer and, therefore, there is no transfer of property in it by the manufacturer to the customer as a chattel.

H 36. (1970) 2 sec 2a1.

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& ORS. [DIPAK MISRA, J.] 26~ In Hindustan Aeronautics Limited v. State of Orissa 37, A the Court, while emphasizing that there is no rigid or inflexible , rule applicable alike to all transactions which can indicate distinction between a contract for sale and a contract for work and labour, opined that basically and primarily, whether a particular contract was one of sale or for work and labour B depended upon the main object of the parties in the circumstances of the transaction.

27. The aforesaid authorities clearly show that a works contract could not have been liable to be taxed under the State C sales tax laws and whether the contract was a works contract or a contract for sale of goods was dependent on the dominant intention as reflected from the terms and conditions of the contract and many other aspects. In certain cases, the court has not treated the contract to be a works contract by repelling the plea of the assessee after taking into consideration certain special circumstances. No straitjacket formula could have been stated to be made applicable for the determination of the nature of the contract, for it depended on the facts and circumstances of each case. As the works contract could not be made amenable to sales tax as the State Legislatures did not have the legislative competence to charge sales tax under Entry 48 List II of the Seventh Schedule of the Constitution on an indivisible contract of sale of gopds which h~d component of labour and service and it was not within the domain of the assessing officer to dissect an indivisible contract to distinguish the sale of goods constituent and the labour and service F I component. The aforesaid being the legal position, the Parliament brought in the Forty-sixth Amendment by incorporating Clause (29A) in Article 366 of the Constitution to l!ndo the base of the Constitution Bench decision in Gannon G Dunker/ey's-1 case.

28. To have a complete picture, we think it apt to reproduce the said constitutional provision: -

37. (1984) 2 SCC16. H

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A "366 (29A) "tax on the sale ~r purchase of goods" includes .. ·_, (a) a tax on the transfer, otherwise than in pursuance of a contraCt, of property in any goods for cash, deferred payment or other valuable consideration; B (b) a tax on the transfer of property, in goods (whether as goods or in some other form) involved in the execution of a works contract;

c (c) a tax on the delivery of goods on hire pvrchase or any system of payment by instalments;

(d) a tax on the transfer of the right to use any goods for any purpose (whether or .not for a specified period) for ~ash, deferred payment or other valuable consideration; D (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

E (f) a tax on the supply, by way of or as part of any ·service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase or those goods by the person to whom such transfer, delivery or supply is made;"

29. After the amendment in the Constitution, various States amended their legislations pertaining to sales tax for levy of sales tax on works contract. The constitutional validity of the H Forty-Sixth Amendment by which the State Legislatures were

p. 961 Copy page pinpoint

& ORS. [DIPAK MISRA, J.] confei:red the competence to levy sales tax on certain transactions, as incorporated in sub-clauses (a) to (f) of Clause (29A) of Article 366 of the Constitution as well as the amendments made by the State Legislatures, were challenged in Builders' Association (supra). The Constitution Bench took note of the various problems which arose on account of the decisions in the field pertaining. to works contract and the recommendations by the Law Commission in its 61 st Report recommending for certain amendments in the Constitution so as to levy sales tax on transactions of the nature which were not liable to sales tax and the purpose of the amendment to c bring many of the transactions in which property in goods passed for the purpose of levy of sales tax within the scope of power of the State to levy tax. The Constitution Bench also took note of the amendments that were incorporated in clause (1) of Article 269 and clause (3) of Article 286 and eventually 0 upheld the constitutional validity of the amendment. In that context, the court observed that sub-clause (b) of clause (29- A) states that 'tax on the sale or purchase of goods' includes, among other things, a tax on the transfer of property in the goods (whether as goods or in some other form) involved in E the execution of a works contract, but does not say that a tax on the sale or purchase of goods included a tax on the amount paid for the execution of a works contract. It refers to a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract and the latter part of clause (29A) of Article 366 of the Constitution F makes the position very clear. Further, the Court explained the constitutional validity of clause (29A) of Article 366 of the Constitution by expressing thus:

".... a transfer of property in goods under sub-clause (b) G of clause (29-A) is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and a purchase of those goods by the person to whom such transfer is made. The object of the new definition introduced in clause (29-A) of Article 366 H

p. 962 Copy page pinpoint

A of tile Constitution is, therefore, to enlarge the scope of 'tax on sale or purchase of goods' wherever it occurs in the Constitution so that it may include within its scope the transfer, delivery or supply of goods that may take place under any of the transactions referred to in sub-clauses (a) B to (f) thereof wherever such transfer, delivery or supply becomes subject to levy of sales tax. So construed the expression 'tax on the sale or purchase of goods' in Entry. 54 of the State List, therefore, includes a tax on the transfer of property in goods (whether as goods or in some other c form) .involved in the execution of a works contract also."

After so stating, the Constitution Bench, observed that all transfers, deliveries and supplies of goods referred to in clauses (a) to (f) of clause (29-A) of Article 366 of the Constitution are subject to the restrictions and conditions D mentioned in clause (1.), clause (2) and sub-clause (a) of clause (3) of Article 286 of the Constitution and the transfers and deliveries that take place under sub-Clauses (b), (c) and (cf) of . clause (29-A) of Article 366 of the Constitution are subject to an additional restriction mentioned ·in sub-clause (b) of Article E 286(3) of the Constitution. The Constitution Bench further opined that it is open to the States· to segregate works contract into two separate components or contracts by legal fiction, namely, contract for sale of goods involved in the works contract and for supply of labour and service. F

30. At this juncture, the pronouncement in M/s Gannon Dunkerley and Co. and others v. State of Rajasthan- and others38 is necessary-to be noted. While dealing with the various submissions of the counsel for the States, the Constitution G Bench referred to the Builders' Association case wherein it has been clearly stated that the tax leviable by virtue of sub- clause (b) of clause (29A) of Article 366 of the Constitution becomes subject to the same discipline to which any levy under

H 38. (1993)' 1 sec 364.

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& ORS. [DIPAK MISRA, J.] Entry 54 of the State List is made subject to \Under the A Constitution. After so stating, the Court did not think it appropriate to reopen the issues which were covered under the Builders' Association case and proceeded to deal with the matter in accordance with the law laid down in that case. B

31. Be it noted, the Constitution Bench, in Gannon Dunkerley-// (supra), has unequivocally restated and reaffirmed the principle that the States have legislative power to impose tax on the transfer of property in goods or in some other form in the execution of works contract and they have also the power to bifurcate the contract and levy sales tax on the value of materials used in the execution of the works contract, regard being had to the principle that the State Legislatures have been empowered under Clause (29A) of Article 366 to levy ta.x on the deemed sales. We may state with profit that certain principles have been laid down in the said decision to which we shall refer to at the appropriate stage.

32. Having dealt with the aforesaid authorities, as advised at present, we shall refer to certain authorities as to how the term ''works contract" has been understood in the contextual perspective post the constitutional amendment. In Hindustan Shipyard Ltd. (supra), the Court observed that the distinction between a contract of sale and a works contract is not free from. difficulty and has been the subject-matter of several judicial decisions. It is further observed that neither any straitjacket formula can be made available nor can such quick-witted tests devised as would be infallible, for it is all a question of determining the intention of the parties by culling out the same on an overall reading of the several terms and conditions of a contract. Thereafter, the two-Judge Bench set out three categories of contracts and explained the contours, namely, (1) the contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price; (i1) it may be a contract for work in which the use of the materials is accessory or incidental to the execution of the work; H

p. 964 Copy page pinpoint

A and (iir) it may be a contract for supply of goods where some work is required to be done as incidental to the sale. Thereafter, it opined that the first contract is a composite contract consisting of two contracts, one of which is for the sale of goods and the other is for work and labour; the second is . B clearly a contract for work and labour not involving sale of goods; and the third is a contract for sale where the goods are sold as chattels and the work done is merely incidental to the sale.

33. Commenting on the said decision in Larsen and c Toubro (supra), a three-Judge Bench opined that after the 46th • Amendment, the thrusts laid down therein are not of much help in determining whether the contract is a works contract or a contract for sale of goods. We shall elaborate the perception as has been stated in Larsen and ToubFo (supra) at a later stage.

34. In Bharat Sanchar Nigam Ltd. (supra), a three-Judge Bench was concerned with the question of the nature of the transactiqn with regard to whether mobile phone connections which are enjoyed, is a sale or is a service or both. Though the context pertained to the meaning of the term "goods" under Article 366(29A), yet the Court referred tcr the case in Associated Cement Companies Ltd. v. Commissioner of Customs39 and stated thus: - F "After the Forty-sixth Amendment, the sale element of those contracts which are covered by the six sub-clauses of clause (29-A) of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test G applying. Therefore when in 2005 C.K. Jidheesh v. Union of lndia 40 held that the aforesaid observations in Associated Cement were merely obiter and that Rainbow

H 39. (200.1) 4 sec 593.

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& ORS. [DIPAK MISRA, J.] Colour Lab v. State of M.P. 41 was still good law, it was not A correct."

35. We have referred to the aforesaid decision only to point out that the "dominant nature test" relating to the. works contract that gets covered under Article 366(29A) of the 8 Constitution has been held therein to be not applicable. •

36. In K. Raheja Development Corporation v. State of Karnataka 42 , the appellants were involved in carrying on business of real estate development and allied contracts and had entered into development agreement with the owners of the land. They had entered into agreement with the intended purchasers for residential apartments and/or commercial complexes. The agreement provided that on completion of the construction, the residential apartments or the commercial complexes would be handed over to the purchasers who would get an undivided interest in the land also with the further condition that the owners of the land would then transfer the · ownership directly to the society which was being formed under the State Legislation. The question that arose for consideration was whether the appellants, the dealers, were liable to pay turnover tax under the Karnataka Sales Tax Act. Their returns were not accepted by the adjudicating authority and they were assessed to sales tax. Facing failure at all levels including the High Court, the appellant preferred an appeal by way of special leave. The two-Judge Bench considered the scope of Section F 2(1)(u-1) of the Karnataka Sales Tax Act and other provisions and, considering the wide amplitude of the definition of "works contract" in the Act, interpreted the contract and came to hold that the contract remained a works contract within the meaning of the term as defined under the said Act. The Bench further G clarified that if the agreement was entered into after the flat or unit was already constructed, then there would be no works

40. (2000) 13 sec 37.

41. (2005) 2 sec 385.

42. (2005) 5 sec 162. H

969 SUPREME COURT REPORTS. [2014) 5 $.C.R.

' A contract. But so long as the agreement was entered into before the construction was completed, it would be a works contract. We may hasten to add that the aforesaid decision has been approved to have been laying down the correct legal position in Larsen and Toubro (supra). B ,37. In State of U.P. and others v. P.N.C. Construction Co. Ltd. and others 43 , the raw materials were bought by the assessee which were used in the manufacture of hot mix utilized for road construction. The question that emanated before the Court was whether, on the said facts, the Department was right in denying the benefit of recognition certificate as contemplated under Section 48 of the U.P. Trade Tax Act, 1948. In that context, it was observed that after the introduction of sub-clause (b) of Clause 29-A in Article 366, the emphasis is on the expression "transfer of property in goods (whether goods as such or in some other form)" and, therefore, the works contract which is an indivisible contract is, by a legal fiction, divided into two parts-one for sale of goods and the other for supply of labour and services, which has made it possible for the States to levy sales tax on the value of the goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods supplied in a building contract, for the concept of "value addition" comes in.

· 38. Reference to the aforesaid authorities is for the purpose that post the constitutional amendment, the Court has been interpreting a contract of work, i.e., works contract in the constitutional backdrop. In certain cases, which involve transfer of property and also an element of service in the context of work rendered, it has been treated as works contract.

G 39. The essential characteristics have been elucidated by a three-Judge Bench in Larsen and Toubro (supra) thus: -

1 "As the very title of Article 366 shows, it is the definition

H 43. (2007) 7 sec 320. I

KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. 96/,: & ORS. [DIPAK MISRA, J.] clause. It starts by saying that in the Constitution unless the· A context otherwise requires the expressions defined in that article shall have the meanings respectively assigr:ied to them in the article. The definition of expression "tax on sale or purchase of the goods" is contained in clause (29-A). If the first part of clause (29-A) is read with sub-clause (b) B along with latter part of this clause, it reads like this: "tax on the sale or purchase of the goods" includes a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract and such transfer, delivery or supply of any goods c shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made. The definition of "goods" in clause (12) is inclusive. It includes all materials, commodities and 0 articles. The expression "goods" has a broader meaning ,,than merchandise. Chattels or movables are goods within the meaning of clause (12). Sub-clause (b) refers to transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. E The expression "in some other form" in the bracket i.s of utmost significance as by this expression the ordinary understanding of the term "goods" has been enlarged by bringing within its fold goods in a form other than goods. Goods in some other form would thus mean goods which have ceased to be chattels or movables or merchandise F and become attached or embedded to earth. In other words, goods which have by incorporation become part of immovable property are deemed as goods. The definition of "tax on the sale or purchase of goods" includes a tax on the transfer of property in the goods as goods or G' . which have lost its form as goods and have acquired some other form involved in the execution of a works contract."

40. On the basis of the aforesaid elucidation, it has been deduced that a transfer of property in goods under Clause H

p. 968 Copy page pinpoint

A (29A)(b) of Article 366 is deemed to be a sale of goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made. One thing is significant to note that in Larsen and Toubro (supra), it has been stated that after B the constitutional amendment, the narrow meaning given to the term "works contract" in Gannon Dunkerley-I (supra) no longer survives at present. It has been observed in the said case that even if in a contract, besides the obligations of supply of goods and materials and performance of labour and c ~ervices, some additional obligations are imposed, such contract does not cease to be works contract, for the additional obligations in the contract would not alter the nature of the contract so long as the contract provides for a contract for works ,and satisfies the primary description of works contract. It has been further held that once the characteri:sucs or elements of 0 works contract are satisfied in a contract, then irrespective of additional obligations, such contract would be covered by the term "works contract" because nothing in Article 366(29-A)(b) limits the term "works contract" to contract for labour and E service only.

41. In the said case, another significant aspect has been ·considered. That relates to the "dominant nature test". We think it apt to reproduce what has been stated in Larsen and Toubro . (supra):- F "Whether the contract involved a dominant intention to transfer the property in goods, in our view, is not at all material. It is not necessary to ascertain what is the dominant intention of the contract. Even if the dominant intention of the contract is not to transfer the property in G goods and rather it is the rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in sucl1 co11tract if it otherwise has elements of works contract. .. "

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& ORS. [DIPAK MISRA, J.]

42. At this juncture, it is condign to state that four concepts A have clearly emerged. They are (i) the works contract is an indivisible contract but, by legal fiction, is divided into two parts, one for sale of goods, and the other for supply of labour and services; (ii) the concept of "dominant nature test" or, for that matter, the "degree of intention test" or "overwhE21ming 8 component test" for treating a contract as a works contract is not applicable; (iii) the term "works contract" as 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 incorpora~ed in the contract would not change the nature of the contract.

43. Having noted the conceptual telescopic arena of the term "works contract" and the principles we have stated hereinabove, it is necessitous to refer to how the installation of a lift was understood and treated prior to the decision in Kone Elevators case. 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 res~ect 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 H

p. 970 Copy page pinpoint

A Commiss:oner 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 8 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 . H specifically provided for the item of maintenance. The High

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& ORS. [DIPAK MISRA, J.] 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 c 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 0 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 p'ossible 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 precisio"n in execution for rendering satisfactory service and the obligation to maintain which are integral to the supply and installation.

45. In this backdrop, we shall now proceed to deal with the submissions advanced by the learned counsel for the H

p. 972 Copy page pinpoint

A respondents which we have already noted. The fundamental submission of Mr. Dwivedi is that the manufacturer of the lift retains ownership iri the components as property while producing the completed lift an~. hence, it would be a case of pw-e manufacture. A distinction has been sought to be made B that if another agency is appointed to install, it does not have the ownership of the components. To bolster the basic submission, as we find, he has referred to various facets. The said proponement, as we understand, is based on the assumption that the supplier remains the owner of the c components as per the contract; that the manufacture is a process or activity which bripgs in existence new identifiable and distinct component; that installation is an integral part of the manufacturing process and proceeds from the manufacture of the components themselves; that the concept of permanent fixture to a building cannot be enlarged to such an extent to put 0 it in the realm of works contract or to take it away from the conceptual meaning of manufacture. We have already dealt with the principles stated in Patnaik and Co. (supra), Hindustan Aeronautics Ltd. (supra), T. V. Sundaram Iyengar (supra), Kai/ash Engineering Co. (supra) and the observations made E by Sikri, J., in Patnaik & Co. (supra) wherein the decision in Anglo-Egyptian Navigation Co. v. Rennie 44 was distinguished by stating that whenever a contract provides for the fixing of a chattel to another chattel, there is no sale of goods. Be it noted, in Patnaik & Co. (supra), an illustration was given that when a F dealer fits tyres supplied by him to the car of the customer, it would tantamount to sale of the tyres by the dealer to the customer. In these cases, the Court was really dealing with the terms. of the contract contextually to come to a conclusion as to whether the contract in question was a contract for sale or a G works contract. The fundamental principle that was applied is that what was sold was a chattel as chattel or the contract was a composite one on a different base/foundation.

H 44. (1875) LR 10 CP 271.

p. 973 Copy page pinpoint

& ORS. [DIPAK MISRA, J.]

46. The other decisions which have been relied upon by A Mr. Dwivedi to show that installation is a part of the manufacturing process are J. Marcel (Furriers) Ltd. (supra), Cen_tral India Machinery Manufacturing Company Ltd. (supra), Norman Wright (Builders) Ltd. (supra), Titan Medical Systems (supra}, MIL India Ltd. (supra), Eastend Papers Industries Ltd. B (supra) and Aspinwall & Co. (supra). In J. Marcel (Furriers) Ltd. (supra}, the plaintiff had kept a stock of furs made up ready for sale and they also made up furs, coats, jackets, and boleros for customers. An order was placed by the defendant for a mutation mink jacket. As the jacket was not up to mark, it was c rejected by the defendant. In that context, the Court observed that though huge degree of skill and craftsmanship had gone into making up of a fur jacket as was made for the defendant, yet it was no more than making an article for sale to the defendant on a special order and the transaction, in fact, 0 related to sale of a complete article and the receipt of the price.

47. In Norman Wright (Builders) Ltd. (supra}, an agreement was entered into by the appellant for fixing of black- out curtains at some London police stations. The appellant- plaintiff contended before the Court that the fixing of curtains was not a sale of goods but a contract for work and labour and the supply of material in connection therewith. Repelling the said submission, it was held that as the contract involved transferring chattels, namely, curtains to the defendants for a price, in which they had no previous right, it was a sale of goods.

48. Name Tulaman Manufacturers Pvt. Ltd., Hyderabad v. Collector of Central Excise, Hyderabad 45 , Eastend Paper Industries Ltd. (supra}, Aspinwall & Co. Ltd. (supra), MIL India G Ltd. (supra) and Sirpur Papers Mills Ltd. (supra) are the decisions under the Central Excise Act, 1944 which are really not of relevance as they relate to the conr.ept, term and

45 (19R 0 ' 1 .sec 1 n. H

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A expression "manufacture" as used and understood under the said Act. The concept of "manufacture" has limited relevance and cannot be a determining factor to decide whether the contract is one for supply of goods or is a composite contract. In Name Tulaman Manufacturers Pvt. Lttf. (supra), installation of weighbridges was held to be manufacture for the purpose of excise duty, observing that th'e assessee was obsessed with the idea that part of the machinery was liable to duty but the whole of the product was not dutiable as excisable goods. Similarly, in Aspinwall & Co. (supra), curing of coffe·e, it was held, amounts to manufacture, as a new and distinct commodity of independent identity, distinct from raw material, had come into existence. In Sirpur Paper Mills Ltd. 's case, the question arose whether paper making machine was an immovable prope.rty as it was embedded on the earth and, therefore, not exigible to excise duty. This Court opined that paper making 0 m?chine was exigible to excise duty as the whole machine could be dismantled and it was attached to the earth only for operational efficiency. Though the entire machine was assembled from various components, yet, by itself, it was a new marketable commodity that had emerged as a result of the manufacturing activity. The aforesaid decisions cannot be taken aid of to come to a conclusion that installation is assembling and, in the ultimate eventuate, it is a part of the manufacturing process. We are disposed to think so as there is a fundamental fallacy in the submission as far as installation of the lift is concerned. It is not a plant which is erected at the site. It is not a different item like coffee which comes into the market after processing. It is also not like a "weighbridge" as is understood under the excise law. It has to be understood in the conceptual context of the manufacture and installation of a lift in a building. G The lift basically comprises components like lift car, motors, ropes, rails, etc. having their own identity even prior to installation. Without installation, the lift cannot be mechanically functional because it is a permanent fixture of the building having been so designed. These aspects have been elaborately H distussed in Otis Elevator (supra) by the High Court of

p. 975 Copy page pinpoint

& ORS. [DIPAK MISRA, J.] Bombay. Therefore, the installation of a lift in a building cannot A be regarded as a transfer of a chattel or goods but a composite contract. Hence, we unhesitatingly hold that the said decisions are not of much help to the learned sehior counsel for the State of Orissa. B

49. Coming to the submissions of Mr. Venkataramani, we find that the fundamental facet of the contention is based on the principle of "deliverable state" and the intention of the purchaser to obtain an identifiable product or goods and the said identified product comes into being after the components are fixed at the site to make the lift usable. As submitted, the rendering of service is only to make the lift deliverable. The aforesaid submission, on proper appreciation, really rests on the bedrock of incidental or ancillary service involved in the installation of lift. We shall deal with this aspect when we address more elaborately to the dominant nature test and the incidental service in the context of clause 29A(b) of Article 366 of the Constitution.

50. As far as the submission put forth by the learned counsel for the State of Gujarat, it is based on the edifice that the "dominant nature test" is still available in view of the decisions in Bharat Sanchar (supra) and Larsen and Toubro (supra). On a careful reading of the written note of submission of the learned counsel for the State of Gujarat, we find that the learned counsel have not appositely understood the ratio laid • F down in the aforesaid authorities. Reliance was placed on para 45 of the decision in Bharat Sanchar (supra). It is noticeable that the Court was analyzing the principle stated in Gannon Dunkerley-I (supra) and thereafter, in para 49, which we have reproduced hereinabove, it has been clearly held that after the G Forty Sixth Amendment of the Constitution, the works contract which is covered under Clause (29A)(b) of Article 366 of the Constitution is separable and may be subject to sales tax by the State under Entry 54 of List-II and there is no question of the dominant nature test being applicable. Thus, the submission H

97.6 SUPREME COURT REPORTS [2014] 5 S.C.R. I

A is absolutely misconceived.

51. The submission of Dr. Manish Singhvi, learned counsel for the State of Rajasthan, primarily rests on the base that decisions which have been discussed in the referral order, do not lay down the correct law. In our considered opinion, the 9 judgments rendered in the said cases rested on the nature of the contract and the tests laid down in Gannon Dunkerley-I (supra). We see no reason to hold that the said decisions do not lay down the correct law in the context of works contract as it was understood and treated prior to the Forty Sixth C Amendment. ,

52. Coming to the stand and stance of the State of Haryana, as put forth by Mr. Mishra, the same suffers from two basic fallacies, first, the supply and installation of lift treating it as a contract for sale on the basis of the overwhelming component test, because there is a stipulation in the contract that the customer is obliged to undertake the work of civil construction and the bulk of the materia·I used in construction belongs to the manufacturer, is not correct, as the subsequent discussion would show; and second, the notification dated 17th May, 2010 issued .by the Government of Haryana, Excise and Taxation Department, whereby certain rules of the Haryana Value Added Tax Rules, 2003 have been amended and a table has been annexed providing for "Percentages for Works F Contract and Job Works" under the heading '~Labour, service and other like charges as percentage of total value of the contract" sr;iecifying 15% for fabrication and installation of elevators (lifts) and escalators, is self-contradictory, for once it is treated as a composite contract invoking labour and service as a natural corollary, it would be works contract and not a G contract for sale. To elaborate, the submission that the element of labour and service can be deductec;I from the total contract value without treating the composite contract as a works contract is absolutely fallacious. In fact, it is an innovative subterfuge. We are inclined to think so as it would be frustrating H

p. 977 Copy page pinpoint

& ORS. [DIPAK MISRA, J.] the constitutional provision and, accordingly, we unhesitatingly repel the same.

53. As far as submissions of Mr. K.N. Bhat, learned senior counsel for the State of Karnataka, and Mr. P.P. Malhotra, learned Additional Solicitor General, are concerned, as their stand is that the decision in Kone Elevators (supra) is not correct, we have only noted that for completeness.

54. ·Having dealt with the submissions advanced by the learned counsel for various States and the learned Additional Solicitor General for the Union of India, we shall presently proceed to deal with the correctness of the legal position as stated in Kone Elevators case. In the said case, a three-Judge Bench. took note of the submissions on belJalf of the Department that the main object of the contract in question was to sell the lifts and the works done by the assessee for installation was incidental to the sale of lifts. It had also taken note of the submission that the legislature has classified the commodity "lift" under Entry 82 of the First Schedule to the Andhra Pradesh General Sales Tax Act, 1957 keeping in mind that the word "installation" was ancillary to the "sale" of lifts. The E Court, while dealing with the differentiation between "contract for sale" and "works contract", opined thus: -

"5. It can be treated as well settled that there is no standard formula by which one can distinguish a "contract for sale" F 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, G 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 H

978 SUPREME COURT REPORTS [2014] 5 S',C.R.

A 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 is: when and how the property of the dealer in such a transaction passes to the customer: is it by transfer at the B 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, 1t 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 c the transaction as a whole has to be taken into consideration. The predominant object of the contract, the . circumstances of the case and the custom of the trade · provide 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."

55. After so stating, the three-Judge Bench adverted to the definitions in the State Act, referred to the decision in Gannon Dunkerley-I (supra), placed reliance on the decision in G Hindustan Shipyard Ltd. (supra) and, analyzing the principle stated therein, observed thus: -

1'9. In the case of Hindustan Shipyard Ltd. v. State of A.P. this Court held that if the thing to be delivered has any Individual existence before the delivery as the sole H

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& ORS. [DIPAK MISRA, J.] property of the party who is to deliver it, then it is a sale. If A 1 the bulk of material used in construction belongs to the manufacturer 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 B material alone but the relative importance of the material qua the work, skill 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 c 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."

56. Applying the above test, the learned Judges referred to the terms of the contract and took note of the fact 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 would the assessee undertake installation of lift if the site was not kept ready by the customer inasmuch as under clause 4(g) of the "Customers' Contractual Obligations", the assessee reserved the right to charge the customer for delay in providing the required facilities. The Court· observed that these facts clearly indicated 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 and the said "supply" part included installation of lift: Therefore, the learned H

p. 980 Copy page pinpoint

A Judges further observed that the contractual obligation of the assessee was only to supply and install the lift, while the customer's obligation was to undertake the work connected in keeping the site ready for installation as p~r the drawings. The Court took note of the contractual obligations of the customer B 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 and ruled that it was clear that the transaction in question was a contract of "sale" and not a "works contract". The Cou~ perused the c brochure of the assessee Company and noticed that the assessee was in the business of manufacturing of various types of lifts, namely, passenger lifts, freight elevators, transport elevators and scenic lifts and a combined study of the above models, mentioned in the brochure, indicated that the assessee had been exhibiting various models of lifts for sale and the said 0 lifts were being sold in various colours with various capacities and variable voltage. From the further analysis, it is manifest that the Court took into account the fact that it was open for a prospective buyer to place purchase order for supply of lifts as per' his convenience and choice and ruled that the assessee, on facts, satisfied the twin requirements to attract the charge of tax under the 1957 Act, namely, that it carried on business of selling the lifts and elevators and it had sold the lift~ and elevators during the relevant period in the course of its business. To strengthen the conclusion, it has been held 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 are only incidentally used. ' G ' 57. From the aforesaid decision, it is perceptible that the .three-Judge Bench has drawn distinction between the contract for safe and works contract and, in that context, the essence of the contract or reality of the transaction aS! a whole, regard being had to the predominant object of the contract, the H circumstances of the case and the custom of the trade have

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& ORS. [DIPAK MISRA, J.] been taken into consideration. In that context, the learned A Judges have opined that it is not the bulk of the material al'one but the relevant importance of the material qua the work, skill and labour of the payee which also has to be seen and if the major component of the end product is the material consumed in producing the chattel to be delivered and skill and labour are B employed for converting the main corjiponents into the end product, the skill and labour are only incidentally used and the delivery of the end product by the seller to thi(buyer would constitute a sale. On the aforesaid principle, the three-Judge Bench has finally ruled that a dealer carries on business of c selling lifts and elevators and 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 are incidentally used and, therefore, the delivery of the end product by the assessee qua 0 the customer has to be constituted as a sale and not a works contract.

58. To understand the reasons ascribed in the said decision, it is requisite to appreciate the principle relating to the overwhelming component test or major component test. We E have already referred to the decision in Bharat Sanchar (supra) wherein it has been clearly stated that the dominant nature test has no application. The said principle has been reiterated in Larsen and Toubro (supra) by stating thus: - F "87. It seems to us (and that is the view taken in some of the decisions) that a contract may involve both a contract of work and labour and a contract of sale of goods. In our opinion, the distinction between contract for sale of goods ~nd contract for work (or service) has almost diminished G in the matters of composite contract involving both a contract of work/labour and a contract for sale for the purposes of Article 366(29-A)(b). Now by legal fiction under Article 366(29-A)(b), it is permissible to make such contract divisible by separating the transfer of property in H

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A goods as goods or in some other form from the contract of work and labour. A transfer of property in goods under clause (29-A)(b) of Article 366 is deemed to be a sale of goods involved in the execution of a works contract by the person making the transfer and the purchase of those B goods by the person to whom such transfer is made, For this reason, the traditional decisions which hold that the substance of the contract must be seen have lost their significance. What was viewed traditionally has to be now understood in light of the philosophy of Article 366(29-A)." c xxx xxx xxx "97 .5. A contract may involve both a contract of work and labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and D contract for work (or service) is virtually diminished.

97.6. The dominant nature test has no application and the traditional decisions which have held that the substance of the contract must be seen have lost their significance where transactions are of the nature contemplated In E Article 366(29-A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contract. The enforceability test is also not determinative."

59. It is also necessary to state here that in Larsen and 11,oubro (supra), the question arose whether taxing of sale of goods in an agreement for sale of flat which is to be constructed by the developer-promoter is permissible under the Constitution. The three-Judge Bench opined that though the ultimate transaction between the parties may be sale of the flat, yet it cannot be said that the characteristics of works contract cjre not involved in that transaction because the term "works

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& ORS. [DIPAK MISRA, J.] contract" is nothing but a contract in which one of the parties is A obliged to undertake OF. to execute the work and such an activity of construction bears all the characteristics and elements of works contract. In that context, in paragraph 107 of the decision, reliance was placed on Builders' Association (supra) wherein the contention that a flat is sold as a flat and not as an 8 aggregate of its component parts was negated on the ground that the properties that were transferred to the owner in the execution of the works contract are not goods involved in the execution of the works contract, but a conglomerate, that is, the entire building which is actually constructed. c

60. The aforesaid analysis has to be understood on the anvil of Article 366 (29A) of the Constitution. In this regard, we may fruitfully reproduce a passage from Builders' Association case: - D "... After the 46th Amendment the works contract which was an indivisible one is by a legal fiction altered into a cdntract which is divisible into one for sale of goods and the other for supply of labour and services. After the 46th Amendment, it has become possible for the States to levy E sales tax on the value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods and materials supplied in a building contract which had been entered into in two distinct and separate parts as stated above." F

61. Explaining the said passage, the Constitution Bench, in Gannon Dunkerley-I/ (supra), has opined thus:-

"This would mean that as a result of the Forty-sixth Amendment, the contract which was single and indivisible G has been altered by a legal fiction into a contract which is divisible into one for sale of goods and other for supply of labour and services and as a result such a contract which was single and indivisible has been brought on a par with a contract containing two separate agreements." H

984 SUPR~ME COURT REPORTS [2014] 5 S.C.R.

A 62. It has been further observed therein as follows: -

"36. If the legal fiction intFOduced by Article 366(29-A)(b) is carried to its logical end it follows that even in'a single and indivisible works contract there is a deemed sale of the gaods which are involved in the execution of a works B contract. Such a deemed sale has all the incidents of a .sale of goods involved in the execution of a works contract where the contract is divisible into one for sale of goods and the other for supply of labour and services." I

C 63. Considered on the touchstone of the aforesaid two Constitution Bench decisions, we are of the convinced opinion that the principles stated in Larsen and Toubro (supra) 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)(~) 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.

64. 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 the customers' obligation 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 I 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 tha,t in all the cases that have been brought before us, there is H

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& ORS. [DIPAK MISRA, J.] 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 c brochures for various types of lifts an'tl 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 0 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 H

p. 986 Copy page pinpoint

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 B 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 l~gally 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 c installation of the lift which obviously conveys performance of labour and service. Hence, the fundamental characteristics of works comract are satisfied. Thus analysed, we conclude and hold that the decision rendered in Kone Elevators (supra) does not correctly lay down the law and it is, accordingly, overruled.

D 65. Ordinarily, after so stating, we would have directed the matter to be listed before the appropriate Division Bench. However, it is not necessary to do so in this batch of cases inasmuch as the writ petitions have been filed either against the show-cause notices where c~ses have been reopened or against the orders of assessment framed by the assessing officers and civil appeals filed against certain assessment orders or affirmation thereof which are based on the decision of the three-Judge Bench in Kone Elevators case. Considering the factual matrix, we direct that the show-cause notices, which have been issued by taking recourse to reopening of assessment, shall stand quashed. 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.

H , 66. The writ petitions and the civil appeals are disposed of with no order as to costs. i

KONE ELEVATOR INDIA PVT. LTD. v. STATE OF T.N. & 987 ORS.