2005 Supreme(SC) 276

2005(3) Supreme 85
Supreme Court of India
(From Andhra Pradesh High Court)
S.N. Variava, Dr. AR. Lakshmanan and S.H. Kapadia, JJ.
State of Andhra Pradesh —Appellant
versus
M/s. Kone Elevators (India) Ltd. —Respondent
Civil Appeal No. 6585 of 1999
Decided on 17-2-2005
Counsel for the Parties :
For the Appellant : Debojit Borkakati and Guntur Prabhakar, Advocates.
For the Respondent : M.N. Rao, Sr. Advocate, J.V. Rao, Ms. Promila, Ms. Sasmita Tripathy, A. Ramesh and Y. Raja Gopala Rao, Advocates.

Important point
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.

Headnote:Andhra Pradesh General Sales Tax Act, 1957—Sections 2(1)(n), 2(1)(t), 5G rw/s 5F, 22(1); Entry 82 of First Schedule—‘Contract of sale’ and ‘works contract’—Assessee is a registered dealer for supply and installation of Kone Elevator—Assessee is a unit of M/s Kone Corporation, Finland who are one of the pioneers in the manufacture of Hi-tech New Generation Elevators in the world—Provisional assessments were made by the Commercial Tax Officer—Assessee claimed deductions of labour charges for composition of tax u/s 5G rw/s 5F of the Act alleging that nature of work undertaken by it constituted ‘works contract’ involving manufacture, supply, installation and commissioning of elevators and lifts—Both the lower authorities treated the disputed turnover of the assessee as falling under Entry 82 of the First Schedule to the Act which was objected to by the assessee—Whether the transactions related to ‘works contract’ or to ‘sale’ of lifts—Transaction in question was a contract of ‘sale’ and not a ‘works contract’—Assessee undertook exclusive installation of lifts manufactured and brought to the site in knocked down state to be assembled by the assessee.

       Held : It can be treated as well settled that there is no standard formula by which one can distinguish a “contract for sale” from a “works-contract”. The question is largely one of fact depending upon the terms of the contract including the nature of the obligations to be discharged thereunder and the surrounding circumstances. If the intention is to transfer for a price a chattel in which the transferee had no previous property, then the contract is a contract for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be judged not by artificial rules but from the intention of the parties to the contract. In a “contract of sale”, the main object is the transfer of property and delivery of possession of the property, whereas the main object in a “contract for work” is not the transfer of the property but it is one for work and labour. Another test often to be applied to is: when and how the property of the dealer in such a transaction passes to the customer: is it by transfer at the time of delivery of the finished article as a chattel or by accession during the procession of work on fusion to the movable property of the customer? If it is the former, it is a “sale”; if it is the latter, it is a “works-contract”. Therefore, in judging whether the contract is for a “sale” or for “work” and labour”, the essence of the contract or the reality of the transaction as a whole has to be taken into consideration. The pre-dominant object of the contract, the circumstances of the case and the custom of the trade provides a guide in deciding whether transaction is a “sale” or a “works-contract”. Essentially, the question is of interpretation of the “contract”. It is settled law that the substance and not the form of the contract is material in determining the nature of transaction. No definite rule can be formulated to determine the question as to whether a particular given contract is a contract for sale of goods or is a works-­contract. Ultimately, the terms of a given ­contract would be determinative of the nature of the transaction, whether it is a “sale” or a “works-contract. Therefore, this question has to be ascertained on facts of each case, on proper construction of terms and conditions of the contract between the parties.­ (Para 5)

       Under the “Price Schedule”, the assessee agreed to supply and install a Kone Elevator for Rs. 3,30,000/-. It was agreed that the customer shall approve the drawings and shall make machine-room Hoistway and the Lift Shaft including power supply for the assessee to commence installation at the time of the delivery of the lift. The contractual obligations of the assessee regarding installation included employing labour to complete the mechanical erection, electrical wiring testing and commissioning of the lift. The assessee agreed that it shall commence installation only after the lifts arrived at the site and upon intimation from the customer that the site was ready as per the drawings. As soon as the lift stood installed, the customer was to take over. It was further agreed that any material supplied by the assessee shall remain their property till the lift was handed over to the customer. The contract in question consisted of certain obligations on the part of the customers under the heading “Customers’ Contractual Obligations”. Under this clause, the customer was obliged to undertake the work of civil constructions consisting of:–

        a) A properly enclosed lift Hoist­way;

        b) A lift pit of proper depth;

        c) Properly lighted machine room; and

        d) Private pockets on the lift well walls. (Para 10)

       On a careful study of the aforestated clause in the Delivery Schedule, it is clear that the customer was required to do the actual work at site for installation of lift. On reading the above clause, it may be observed that the entire onus of preparation and making ready of the site for installation of lift was on the customer. It was agreed that under no circumstances, the assessee shall undertake installation of lift if the site is not kept ready by the customer. Under Clause 4(g) of the “Customers’ Contractual Obligations”, the assessee reserved the right to charge the customer for delays in providing the required facilities. These facts clearly indicate that the assessee divided the execution of the contract into two parts, namely, “the work” to be initially done in accordance with the specifications laid down by the assessee and “the supply” of lift by the assessee. “The work” part in the contract was assigned to the customer and “the supply” part was assigned to the assessee. This “supply” part included installation of lift. Therefore, contractual obligation of the assessee was only to supply and install the lift, while the customer’s obligation was to undertake the word connected in keeping the site ready for installation as per the drawings. In view of the contractual obligations of the customer and the fact that the assessee undertook exclusive installation of the lifts manufactured and brought to the site in knocked-down state to be assembled by the assessee, it is clear that the transaction in question was a contract of “sale” and not a “works-contract”. Moreover, on perusal of the brochure of the assessee Company, one finds that the assessee is in the business of manufacturing of various types of lifts, namely, Passenger lifts, Freight elevators, Transport elevators and Scenic lifts. A combined study of the above models, mentioned in the brochure, indicate that the assessee has been exhibiting various models of lifts for sale. These lifts are sold in various ­colours with various capacities and variable voltage. According to the brochure, it is open for a prospective buyer to place purchase order for supply of lifts as per his convenience and choice. Therefore, the assessee satisfies, on facts, the twin requirements to attract the charge of tax under the 1957 Act, namely, that it carries on business of selling the lifts and elevators and it has sold the lifts and elevators during the relevant period in the course of its business. In the present case, on facts, we find that the major component of the end-product is the material consumed in producing the lift to be delivered and the skill and labour employed for converting the main components into the end-product was only incidentally used and, therefore, the delivery of the end-product by the assessee to the customer constituted a “sale” and not a “works-contract”. Hence, transactions in question constitute “sale” in terms of entry 82 of the first schedule to the said Act and, therefore, section 5G of the said Act was not applicable. (Para 12)