[Writ Petition (C) No. 232 of 2005]
[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, 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, 1098/2013,]
[Civil Appeal Nos. 5116-5121 of 2014 arising out of SLP (C) Nos. 14148-14153/2005]
[Civil Appeal Nos. 5135-5141 of 2014 arising out of SLP (C) Nos. 14961-14967/2005]
[Civil Appeal Nos. 5142-5147 of 2014 arising out of SLP (C) Nos. 17842-17847/2005]
[Civil Appeal No. 5152 of 2014 arising out of SLP (C) No. 5377/2006]
[Civil Appeal No. 5153 of 2014 arising out of SLP (C) No. 7037/2006]
[Civil Appeal No. 5154 of 2014 arising out of SLP (C) No. 30272/2008]
[Civil Appeal No. 5156 of 2014 arising out of SLP (C) No. 30279/2008]
[Civil Appeal No. 5157 of 2014 arising out of SLP (C) No. 5289/2009]
[Civil Appeal Nos. 5159-5160 of 2014 arising out of SLP (C) Nos. 6520-6521/2009]
[Civil Appeal Nos.5162-5164 of 2014 arising out of SLP (C) Nos. 4469-4471/2010]
[Civil Appeal No. 5165 of 2014 arising out of SLP (C) No. 11258/2010]
[Civil Appeal No. 5166 of 2014 arising out of SLP (C) No. 17228/2010]
[Civil Appeal Nos.5167-5168 of 2014 arising out of SLP (C) Nos. 17236-17237/2010]
[Civil Appeal Nos.5170-5172 of 2014 arising out of SLP (C) Nos. 23259-23261/2010]
[Civil Appeal No. 5174 of 2014 arising out of SLP (C) No. 15732/2011]
[Civil Appeal No. 5175 of 2014 arising out of SLP (C) No. 16466/2011]
[Civil Appeal No. 5178 of 2014 arising out of SLP (C) No. 16137/2011]
[Civil Appeal No. 5179 of 2014 arising out of SLP (C) No. 5503/2011]
[Civil Appeal No. 5180 of 2014 arising out of SLP (C) No. 11147/2011]
[Civil Appeal Nos.5181-5192 of 2014 arising out of SLP (C) Nos. 11227-11238/2012]
[Civil Appeal No. 5193 of 2014 arising out of SLP (C) No. 19901/2013]
[Civil Appeal Nos. 5195-5206 of 2014 arising out of SLP (C) Nos. 36001-36012/2013]
[Civil Appeal No. 6285/2010]
Dipak Misra, J. [for R.M. Lodha, C.J., A.K. Patnaik, Sudhansu Mukhopadhaya, JJ. and himself]
1. Leave granted in all the special leave petitions.
2. By an order dated 13.2.2008 in Kone Elevator India Private Limited v. State of Tamil Nadu and others[1], a three-Judge Bench of this Court, while dealing with the writ petition 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 State of A.P. v. Kone 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 Sales Tax[5] and perceiving the manifest discord, thought it appropriate that the controversy should be resolved by the larger Bench. Thereafter, keeping in view the 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.
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. 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, 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 India and others[6], which has been further explained in Larsen and Toubro Limited and another v. State of Karnataka and another[7], 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 and 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. Salve that the “predominant intention test” is no longer relevant and after the decision in Larsen and Toubro (supra), supply 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 assembled/installed to create the working mechanism called lift. Learned senior 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 Bombay Lifts (Amendment) Rules, 2010. He has referred to the Preamble of the Act which stipulates that an Act has been 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 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 like goods, but it only becomes operational after it is installed, adjusted, 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 the obligation to install the lift or to undertake any services in relation to the lift and these elements of value need to be 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 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, 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.
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 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 others[9] 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 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 manufacturing process resulting in the emergence of the product 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 v. Central India Machinery Manufacturing Company Ltd. and others[12], J. Marcel (Furrier) Ltd. v. Tapper[13] 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 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). It is his submission that emphasis on technology and skill including labour and also the instructions 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, Noida[15], Narne Tulaman v. Collector of Central Excise, Hyderabad[16], Titan Medical Systems (P) Ltd. v. Collector of Customs, New Delhi[17], 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 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 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], Man Industrial Corporation (supra) and Vanguard 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 on 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 purpose, he has drawn inspiration from Sirpur Papers Mills Ltd. v. Collector of Central Excise, Hyderabad[23], Commissioner of Central Excise, Ahmedabad v. Solid & Correct Engineering of Works and others[24] and Detroit Steel Cooperage Company v. Sistersville Brewing Company[25].
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 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 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 “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 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.
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 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 others[26]. 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.
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 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 decisions in Patnaik & Co. (supra) and Hindustan Shipyard Ltd. v. State of A.P.[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 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 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 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, whether in goods or in some other form, involved in the execution of work 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 rivalised submissions, it is necessary to delve into the genesis of 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 (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 benefit it had constructed the buildings. On behalf of the Revenue, it was urged that once there was an agreement 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 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 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 sale as regards another. The Constitution Bench further held that on the true interpretation of the expression “sale of goods”, 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 therefore 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 essential ingredients being an agreement to sell movables for a price and property passing therein pursuant 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 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 others[29], 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 materials 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-I (supra) was distinguished on the ground that it related to contract to construct a building and the 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 one but sum total of several reasons which was the foundation of the majority judgment in Patnaik & Co. (supra).
19. In the case of State of Gujarat v. M/s. Kailash Engineering Co. (Pvt.) Ltd.[30], the issue was whether the construction of third class sleeper coaches by the respondent-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 Ltd.[31], 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. Bulmer[32], the Court held that the contract was a works contract and not a contract for sale.
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 and labour and not a contract for sale, for ‘fixing’ the windows 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. M/s. Associated Hotels of 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 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: – “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 whether or not the work and labour bestowed and in anything that can properly become the subject of sale; neither the ownership of 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].”
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 amenities. The Court ruled that the transaction between 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, Ahmedabad) v. M/s. Variety Body Builders[35], this Court, after referring 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 Steel 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 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 Pradesh v. Purshottam Premji[36], 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 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 customer. 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.
26. In Hindustan Aeronautics Limited v. State of Orissa[37], 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 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 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 goods which had 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 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 undo the base of the Constitution Bench decision in Gannon Dunkerley’s-I case.
28. To have a complete picture, we think it apt to reproduce the said constitutional provision: -
“366 (29A) “tax on the sale or 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) 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) a tax on the delivery of goods on hire purchase 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 cash, deferred payment or other valuable consideration;
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;
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 Forty-Sixth Amendment by which the State Legislatures were conferred 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 61st 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 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 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 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 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) 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 of the 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) 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 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 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 (d) of clause (29-A) of Article 366 of the Constitution are subject to an additional restriction mentioned in sub-clause (b) of Article 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.
30. At this juncture, the pronouncement in M/s Gannon Dunkerley and Co. and others v. State of Rajasthan and others[38] is necessary to be noted. While dealing with the various submissions of the counsel for the States, the Constitution 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 Entry 54 of the State List is made subject to under the 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.
31. Be it noted, the Constitution Bench, in Gannon Dunkerley-II (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 tax 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,
(i) 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;
(ii) it may be a contract for work in which the use of the materials is accessory or incidental to the execution of the work; and
(iii) 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 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 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 Toubro (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 transaction 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 to the case in Associated Cement Companies Ltd. v. Commissioner of Customs[39] and stated thus: – “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 applying. Therefore when in 2005 C.K. Jidheesh v. Union of India[40] held that the aforesaid observations in Associated Cement were merely obiter and that Rainbow Colour Lab v. State of M.P.[41] was still good law, it was not 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 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 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 clarified that if the agreement was entered into after the flat or unit was already constructed, then there would be no works 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).
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 4B 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.
39. The essential characteristics have been elucidated by a three-Judge Bench in Larsen and Toubro (supra) thus: – “As the very title of Article 366 shows, it is the definition clause. It starts by saying that in the Constitution unless the context otherwise requires the expressions defined in that article [pic]shall have the meanings respectively assigned 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) 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 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 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. The expression “in some other form” in the bracket is 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 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 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 (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 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 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 elements 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 Article 366(29-A)(b) limits the term “works contract” to contract for labour and 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):- “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 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 such contract if it otherwise has elements of works contract….”
42. At this juncture, it is condign to state that four concepts 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 “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 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 incorporated 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 respect 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 Commissioner 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 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 eq