Supply and Installation of lifts is “Works Contract” and not “Contract of Sale”, Supreme Court overrules Kone Elevators

In a significant judgment delivered on May 6, 2014, the Supreme Court has held that a contract for the erection, installation and commissioning of lifts and elevators is “Works Contract” and not “Contract of Sale”..The decision was rendered in a group of petitions filed by elevator manufacturers seeking a relook at the 2005 decision of the Court in the case of State of AP v. Kone Elevators..The matter was heard by a Constitution Bench which comprised Chief Justice RM Lodha and Justices AK Patnaik, Dipak Misra, SJ Mukhopadhaya and FMI Kalifulla. Justice Kalifulla gave a dissenting judgment..Senior Advocates Harish Salve and Shyam Divan represented Otis Elevators, one of the petitioners in the case. A team led by Economic Laws Practice Managing Partner Rohan Shah advised Salve and Divan. Additional Solicitor General PP Malhotra represented the Union government. Senior Advocate KN Bhat appeared for the State of Karnataka while Senior Advocate Rakesh Dwivedi appeared for State of Orissa. Senior Advocate R Venkataramani represented the States of Tamil Nadu and Andhra Pradesh. Advocates Hemantika Wahi and Preetesh Kumar appeared for the State of Gujarat while Senior Advocate PN Mishra appeared for the State of Haryana..Overruling Kone Elevators, the Court held that the,.“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 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….If there are two contracts, namely, purchase of the components of the lift from a dealer, it would be a contract for sale and similarly, if separate contract is entered into for installation, that would be a contract for labour and service. But, a pregnant one, once there is a composite contract for supply and installation, it has to be treated as a works contract, for it is not a sale of goods/chattel simpliciter.”.It held that the contract of erection and commissioning of lifts/ elevators are works contracts and after the 46th Constitutional Amendment VAT/ Sales Tax can be levied only on the goods component involved in execution of such contracts and not on the total value of the contract..The judgment is likely to have huge revenue implications on the elevator industry as the stand adopted by the States across the country implied taxing even that portion of consideration earned by those in the elevator industry on which service tax has already been paid and collected by the Central Government..Image taken from here