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Reportable

IN THE SUPREME COURT OF INDIA

CIVIL ORIGINAL/APPELLATE JURISDICTION

WRIT PETITION (C) NO. 232 OF 2005

M/S. Kone Elevator India Pvt. Ltd.        … Petitioner

Versus

State of Tamil Nadu and Ors.     … Respondents

WITH 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,

WITH Civil Appeal Nos. 5116-5121        of 2014

       (Arising out of SLP (C) Nos. 14148-14153/2005) WITH

                    Civil Appeal Nos.    5135-5141      of 2014          (Arising out of SLP (C) Nos. 14961-14967/2005)

WITH Civil Appeal Nos. 5142-5147        of 2014    

[Arising out of SLP (C) Nos. 17842-17847/2005 WITH

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Civil Appeal No. 5152           of 2014    [Arising out of SLP (C) No. 5377/2006

WITH Civil Appeal No. 5153           of 2014    

[Arising out of SLP (C) No. 7037/2006 WITH

Civil Appeal No.           5154 of 2014    [Arising out of SLP (C) No. 30272/2008

WITH Civil Appeal No.           5156 of 2014    

[Arising out of SLP (C) No. 30279/2008 WITH

Civil Appeal No. 5157           of 2014    [Arising out of SLP (C) No. 5289/2009

WITH Civil Appeal Nos. 5159-5160        of 2014    

[Arising out of SLP (C) Nos. 6520-6521/2009 WITH

Civil Appeal Nos.5162-5164         of 2014    [Arising out of SLP (C) Nos. 4469-4471/2010

WITH Civil Appeal No.           5165 of 2014    

[Arising out of SLP (C) No. 11258/2010 WITH

Civil Appeal No. 5166           of 2014    [Arising out of SLP (C) No. 17228/2010

WITH Civil Appeal Nos.5167-5168         of 2014    

[Arising out of SLP (C) Nos. 17236-17237/2010 WITH

Civil Appeal Nos.5170-5172         of 2014    [Arising out of SLP (C) Nos. 23259-23261/2010

WITH Civil Appeal No. 5174           of 2014    

[Arising out of SLP (C) No. 15732/2011 WITH

Civil Appeal No.           5175 of 2014    [Arising out of SLP (C) No. 16466/2011

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WITH Civil Appeal No. 5178           of 2014    

[Arising out of SLP (C) No. 16137/2011 WITH

Civil Appeal No. 5179           of 2014    [Arising out of SLP (C) No. 5503/2011

WITH Civil Appeal No. 5180           of 2014    

[Arising out of SLP (C) No. 11147/2011 WITH

Civil Appeal Nos.5181-5192         of 2014    [Arising out of SLP (C) Nos. 11227-11238/2012

WITH Civil Appeal No.           5193 of 2014    

[Arising out of SLP (C) No. 19901/2013 WITH

Civil Appeal Nos. 5195-5206 of 2014  [Arising out of SLP (C) Nos. 36001-36012/2013 and

WITH Civil Appeal No. 6285/2010

J U D G M E N T

Dipak Misra, J. [for R.M. Lodha, C.J., A.K. Patnaik, Sudhansu Mukhopadhaya, JJ. and himself]  

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  

others1, a  three-Judge Bench of this Court, while dealing  

with the writ petition preferred by Kone Elevator India Pvt.  1 (2010) 14 SCC 788

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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 Ram4 and Vanguard Rolling Shutters and Steel  

Works  v.  Commissioner of Sales Tax5 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.  

2 (2005) 3 SCC 389 3 (1969) 1 SCC 567 4 (1970) 26 STC 268 (SC) 5 (1977) 2 SCC 250

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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

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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

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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 others6, 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  6 (2006) 3 SCC 1 7 (2014) 1 SCC 708

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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.

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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

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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

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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 Maharashtra8.  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  

8 (1969) 24 STC 525 (Bom)

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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 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  

9 (1989) 2 SCC 645

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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

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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  Orissa10,  T.V.  Sundram Iyengar  &  

Sons v. State of Madras11, Union of India v. Central  

India Machinery Manufacturing Company Ltd. and  

others12, J. Marcel (Furrier) Ltd. v. Tapper13 and Love  

v. Norman Wright (Builders) Ltd.14.   

10 (1965) 2 SCR 782 11 (1975) 3 SCC 424 12 (1977) 2 SCC 847 13 (1953) 1 All ER 15 14 (1944) 1 All ER 618

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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,  Noida15,  Narne  Tulaman  v.  

Collector  of  Central  Excise,  Hyderabad16, Titan  

Medical  Systems (P) Ltd.  v.  Collector of Customs,  

New Delhi17, Collector of Central Excise, Calcutta-II   

v. Eastend Papers Industries Ltd.18 and Aspinwall &  

15 (2007) 3 SCC 533 16 (1989) 1 SCC 172 17 (2003) 9 SCC 133 18 (1989) 4 SCC 244

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Co.  Ltd.  v.  Commissioner  of  Income  Tax,  

Ernakulam19.   He  has  also  placed  reliance  on  

Underwood  Limited  v.  Burgh  Castle  Brick  and  

Cement Syndicate20 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  Tax21,  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  

19 (2001) 7 SCC 525 20 (1922) 1 KB 343 21 (1978) 4 SCC 260 22 (1979) 1 SCC 487

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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

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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.

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  

23 (1998) 1 SCC 400 24 (2010) 5 SCC 122 25 58 L.Ed. 1166

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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

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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 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  

26 (1989) 3 SCC 634

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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.

27 (2000) 6 SCC 579

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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

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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

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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,  

28 AIR 1958 SC 560

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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

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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

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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  

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

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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 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  29 AIR 1961 SC 1615

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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  

30 AIR 1967 SC 547

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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. Bulmer32, the Court held that  31(1968) 21 STC 245 (SC) 32 (1843) 11 M & W. 243

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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  33 (1972) 1 SCC 472

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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 chattel34.”

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  

34 Halsbury’s Laws of England 3rd Ed., Vol. 34, 6-7.

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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  Builders35,  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  

35 (1976) 3 SCC 500

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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

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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  Premji36,  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  

36 (1970) 2 SCC 287

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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  

Orissa37,  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.

37 (1984) 2 SCC 16

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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

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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,

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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

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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

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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

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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 others38 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  

38 (1993) 1 SCC 364

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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

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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

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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.

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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 Customs39 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  India40 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. 39 (2001) 4 SCC 593 40 (2005) 13 SCC 37 41 (2000) 2 SCC 385

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36. In K. Raheja Development Corporation v. State of  

Karnataka42, 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  

42 (2005) 5 SCC 162

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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 others43, the raw materials were bought by  

the assessee which were used in the manufacture of hot  

mix  utilized  for  road  construction.   The  question  that  

43 (2007) 7 SCC 320

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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

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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  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

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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

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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

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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.

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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

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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

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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

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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  

specifically  provided for  the item of  maintenance.   The  

High 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 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

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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 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  precision  in  execution  for  rendering  satisfactory

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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  

respondents  which  we  have  already  noted.   The  

fundamental  submission  of  Mr.  Dwivedi  is  that  the  

manufacturer  of  the  lift  retains  ownership  in  the  

components as property while producing the completed  

lift and, hence, it would be a case of pure manufacture.  A  

distinction has been sought to be made 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  

components as per the contract; that the manufacture is a  

process  or  activity  which  brings  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

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the concept of permanent fixture to a building cannot be  

enlarged to such an extent to put 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),  Kailash  Engineering  Co.  (supra)  and  the  

observations made by Sikri, J., in  Patnaik & Co. (supra)  

wherein the decision in Anglo-Egyptian Navigation Co.  

v. Rennie44 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  

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 works contract.  The  

44 (1875) LR 10 CP 271

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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.

46. The other decisions which have been relied upon by Mr.  

Dwivedi  to  show  that  installation  is  a  part  of  the  

manufacturing  process  are  J.  Marcel  (Furriers)  Ltd.  

(supra),  Central  India  Machinery  Manufacturing  

Company Ltd. (supra), Norman Wright (Builders) Ltd.  

(supra), Titan Medical Systems (supra), MIL India Ltd.  

(supra),  Eastend Papers  Industries  Ltd.  (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 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

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special order and the transaction, in fact, 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. Narne  Tulaman  Manufacturers  Pvt.  Ltd.,   

Hyderabad  v.  Collector  of  Central  Excise,  

Hyderabad45,  Eastend Paper Industries Ltd.  (supra),  

Aspinwall  & Co. Ltd.  (supra),  MIL India 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  concept,  term  and  45 (1989) 1 SCC 172

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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 Narne Tulaman Manufacturers  

Pvt. Ltd. (supra), installation of weighbridges was held to  

be manufacture for the purpose of excise duty, observing  

that the 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 coffee,  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 property as it was embedded  

on the earth and, therefore, not exigible to excise duty.  

This  Court  opined  that  paper  making  machine  was  

exigible  to  excise duty  as  the whole machine could  be  

dismantled  and  it  was  attached  to  the  earth  only  for

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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.  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

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have been elaborately discussed in Otis Elevator (supra)  

by the High Court of Bombay.  Therefore, the installation  

of a lift in a building cannot 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 senior counsel for the State of Orissa.  

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.

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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 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 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  is  absolutely  

misconceived.

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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 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 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  material  used  in  construction  belongs  to  the  

manufacturer, is not correct, as the subsequent discussion  

would show; and second, the notification dated 17th May,

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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  Contract  and Job Works”  under  

the heading “Labour,  service and other  like  charges as  

percentage of total value of the contract” specifying 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  

contract for sale.   To elaborate, the submission that the  

element of labour and service can be deducted 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  the  constitutional  

provision  and,  accordingly,  we  unhesitatingly  repel  the  

same.

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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  

behalf  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

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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” 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 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  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

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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  Hindustan  Shipyard  Ltd. (supra)  and,  

analyzing the principle stated therein, observed thus: -

“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 property of the party who is to  deliver it, then it is a sale. If the bulk of material  used in construction belongs to the 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  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

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converting  the  main  components  into  the  end  products, the skill and labour are only incidentally  used, the delivery of the end product by the seller  to the buyer would constitute a sale. On the other  hand, if the main object of the contract is to avail  the  skill  and  labour  of  the  seller  though  some  material or components may be incidentally used  during  the  process  of  the  end  product  being  brought into existence by the investment of skill  and labour of the supplier, the transaction would  be a contract for work and labour.”

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”

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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 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 per  

the  drawings.   The  Court  took  note  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 and ruled that  it  was clear  

that the transaction in question was a contract of “sale”  

and  not  a  “works  contract”.  The  Court  perused  the  

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

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that the assessee had been exhibiting various models of  

lifts for sale and the said 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 lifts 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.

57. From the aforesaid decision, it is perceptible that the  

three-Judge  Bench  has  drawn  distinction  between  the  

contract for sale and works contract and, in that context,

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the essence of the contract or reality of the transaction as  

a whole, regard being had to the predominant object of  

the  contract,  the  circumstances  of  the  case  and  the  

custom of the trade have been taken into consideration.  

In that context, the learned Judges have opined that it is  

not  the  bulk  of  the  material  alone  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 employed for converting the main components  

into  the  end  product,  the  skill  and  labour  are  only  

incidentally used and the delivery of the end product by  

the seller to the buyer would constitute a sale.  On the  

aforesaid principle, the three-Judge Bench has finally 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

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incidentally used 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.   

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 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: -

“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 and contract  for work (or service) has almost diminished 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 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

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the person making the transfer and the purchase  of  those  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).”

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 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 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  

Toubro (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

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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 are not involved in that  

transaction because the term “works contract” is nothing  

but a contract in which one of the parties is obliged to  

undertake or 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  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.

60. The  aforesaid  analysis  has  to  be  understood  on  the  

anvil  of  Article  366  (29A)  of  the  Constitution.   In  this

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regard,  we  may  fruitfully  reproduce  a  passage  from  

Builders’ Association case: -

“… After the 46th Amendment the works contract  which was an indivisible one is by a legal fiction  altered into a contract 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 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.”

61. Explaining the said passage, the Constitution Bench, in  

Gannon Dunkerley-II (supra), has opined thus:-

“This  would mean that  as a result  of  the Forty- sixth Amendment, the contract which was single  and indivisible 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.”

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

“36. If  the  legal  fiction  introduced  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  goods  which  are  involved in the execution of a works contract. Such

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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.”

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)(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.

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.

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(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 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 that in all the cases that have been brought before  

us,  there is  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.

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The  labour  and  service  element  is  obvious.   What  has  

been taken note of in Kone Elevators (supra) 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.  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 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

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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  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 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  legally  correct  to

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make such a distinction in respect of lift, for the contract  

itself profoundly speaks of obligation to supply goods and  

materials as well as installation of the lift which obviously  

conveys performance of labour and service.  Hence, the  

fundamental  characteristics  of  works  contract  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.

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 cases 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

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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.

66. The writ petitions and the civil appeals are disposed of  

with no order as to costs.

……………………………………….…CJI [R.M. Lodha]

…………………………………….………J. [A.K. Patnaik]

……………………………………….……J.                                     [Sudhansu Jyoti Mukhopadhaya]    

……………………………………….……J. [Dipak Misra]

New Delhi; May 06, 2014.

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Reportable

IN THE SUPREME COURT OF INDIA

CIVIL ORIGINAL JURISDICTION

WRIT PETITION (CIVIL) NO. 232 OF 2005

M/s. Kone Elevator India Pvt. Ltd. ….Petitioner

VERSUS

State of T.N. & Ors.                   .…Respondents

With

W.P.(C)  No.298/2005,   W.P.(C)  No.487/2005,  W.P.(C)  No.528/2005, W.P.(C) No.67/2006, W.P.(C) No.511/2006, W.P. (C) No.75/2007, W.P.(C) No.519/2008, W.P.(C) No.531/2008,  W.P.(C)  No.548/2008,  W.P.(C)  No.569/2008,  W.P.(C)

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No.186/2009,       W.P.(C) No.23/2010,  W.P.(C)  No.62/2010, W.P.(C) No.232/2010, W.P.(C) No.279/2010, W.P. (C) No.377/2010, W.P.(C) No.112/2011, W.P.(C) No.137/2011,  W.P.(C)  No.181/2011,  W.P.(C)  No.207/2011,  W.P.(C)  No.278/2011,  W.P.(C)  No.243/2011,  W.P.(C)  No.372/2011,  W.P.(C)  No.398/2011,  W.P.(C)  No.381/2011,  W.P.(C)  No.468/2011,  W.P.(C)  No.547/2011,  W.P.(C)  No.107/2012,  W.P.(C)  No.125/2012,  W.P.(C)  No.196/2012,  W.P.(C)  No.263/2012,  W.P.(C)  No.404/2012,  W.P.(C)  No.567/2012,  W.P.(C)  No.145/2013,  W.P.(C)  No.241/2013,  W.P.(C)  No.454/2013,  W.P.(C)  No.404/2013,  W.P.(C)  No.723/2013,  W.P.(C)  No.440/2012,  W.P.(C)  No.441/2012,  W.P.(C)  No.156/2013,  W.P.(C)  No.533/2013,  W.P.(C)  No.403/2012,  W.P.(C)  No.824/2013,  W.P.(C)  No.428/2009,  W.P.(C)  No.1046/2013, W.P.(C) No.1047/2013, W.P.(C) No.1048/2013,  W.P.(C)  No.1049/2013,  W.P.(C)  No.1050/2013,  W.P.(C)  No.1051/2013, W.P.(C) No.1052/2013, W.P.(C) No.1098/2013

SLP(C)   Nos.14148-14153/2005,  SLP(C)  Nos.14961- 14967/2005,  SLP(C)  Nos.17842-17847/2005,  SLP(C)  No.5377/2006,  SLP  (C)  No.7037/2006,  SLP  (C)  No.30272/2008,  SLP  (C)  No.30279/2008,  SLP  (C)  No.5289/2009, SLP (C) No.6520-6521/2009, SLP (C) No.4469- 4471/2010, SLP(C) No.11258/2010, SLP (C) No.17228/2010,  SLP  (C)  No.17236-17237/2010,  SLP  (C)  No.23259- 23261/2010, SLP (C) No.15732/2011, SLP(C) No.16466/2011,  SLP  (C)  No.16137/2011,  SLP  (C)  No.5503/2011,  SLP  (C)  No.11147/2011,  SLP  (C)  No.11227-11238/2012,  SLP  (C)  No.36001-36012/2013,  SLP  (C)  No.19901/2013,  C.A.  No.6285/2010

J U D G M E N T

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Fakkir Mohamed Ibrahim Kalifulla, J.

1. I  had  the  benefit  of  reading  the  illuminating  judgment  of  my  

brother Justice Dipak Misra.  With respect, I state that I am not able  

to subscribe to the views and conclusions of His Lordship.  Therefore,  

I  wish  to  record  my  reasoning  and  conclusions  holding  that  the  

manufacture, supply and installation of lifts are to be treated as a  

contract of ‘Sale’ in the following paragraphs.

2.By an Order dated 13.02.2008, a three Judge Bench of this Court,  

headed by the Hon’ble Chief Justice, referred the following question  

to be decided by a Constitution Bench, namely,

“Whether manufacture, supply and installation of LIFTS   are  to  be  treated  as  a  contract  of  ‘Sale’  or  ‘Works   Contract’?”

3. In the decision reported in  State of Andhra Pradesh vs.  Kone  

Elevators (India) Pvt. Ltd., (2005) 3 SCC 389, it was held that a  

contract for supply of LIFTS constituted a ‘Sale’ and did not amount  

to a ‘Works Contract’ and that the element of service provided by the  

vendor of the elevator was negligible. The referral order referred to  

the other decisions which were drawn to the attention of the Court,  

namely,  State  of  Rajasthan  &  Anr.  vs. Man  Industrial  

Corporation  Ltd.,  [1969]  24  STC  349,  State  of  Rajasthan vs.

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Nenu  Ram, [1970]  26  STC  268  and  M/s.  Vanguard  Rolling  

Shutters  and  Steel  Works  vs. Commissioner  of  Sales  Tax,  

(1977) 2 SCC 250, wherein a contrary view was expressed than what  

has been taken in Kone Elevators (India) Pvt. Ltd (supra).

4.On behalf of the State of Tamil Nadu, Gujarat, Uttar Pradesh and  

Andhra Pradesh, it was submitted that Kone Elevator (India) Pvt.  

Ltd.  (supra) was  correctly  decided  and  placed  reliance  on  

Hindustan Shipyard Ltd. vs. State of Andhra Pradesh, (2000) 6  

SCC 579, apart from contending that the Writ Petition under Article  

32 was not maintainable. In the referral order, while giving liberty to  

raise all contentions at the time of final hearing, the issue came to be  

referred to this Constitution Bench.

5.We heard Mr. Harish N. Salve, learned Senior Counsel appearing  

for the Petitioner and Mr. Rakesh Dwivedi, Dr. Manish Singhvi, Mr. R.  

Venkataramani, Mr. Kapoor, Mr. K.N. Bhatt and Mr. Darius Khambata,  

Counsel  for  the  State  of  Orissa,  Rajasthan,  Tamil  Nadu,  Andhra  

Pradesh, Gujarat, Karnataka and Maharashtra. We also heard Mr. P.  

P. Malhotra, learned Additional Solicitor General,  who appeared on  

behalf of the Union of India.

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6.Mr.  Salve,  learned  Senior  Counsel  for  the  Petitioner  in  his  

submission  contended  that  after  the  46th Amendment,  Article  

366(29A)(b) came to be introduced and in the light of the ratio laid  

down in a recent decision of this Court in Larsen & Toubro Ltd. vs.  

State of Karnataka reported in 2013 (12) SCALE 77, the nature of  

contract as between the Petitioner and the various buyers of LIFTS  

was nothing but a ‘contract for works’ and consequently, whatever  

materials used in the performance of the contract could be taxed  

only based on the prescription contained in Article 366(29A)(b) and  

that  the  transaction  could  not  be  categorized  as  one  of  ‘Sale’  

attracting payment of Sales Tax under the various State enactments,  

as well as the Central Sales Tax Act.

7.At the very outset, it must be stated that in the light of the three  

Judge Bench decision in Kone Elevators (India) Pvt. Ltd. (supra)  

and the decision of the same strength of Judges reported in Larsen  

& Toubro Ltd. (supra), the ultimate answer to the question would  

result  in affirming either of the views of the above two decisions.  

Further, certain Constitution Bench decisions should also have to be  

kept in mind, wherein the basic principle/test to be applied to find  

out as to whether the contract is one for ‘Sale’ or ‘Works Contract’.  

The first decision is the  M/s. Patnaik and Company vs.  State of

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Orissa reported in AIR 1965 SC 1655, wherein the principle stated  

by the High Court was affirmed by the Constitution Bench of this  

Court. The said principle was to the effect that it makes no difference  

whether an article is a ready-made article or is prepared according to  

the  customer's  specification.  It  would  also  make  no  difference  

whether the assessee prepares it separately from the thing and then  

fixes it on it, or does the preparation and the fixation simultaneously  

in one operation. It  was further held that it  is  the essence of the  

transaction viz., the agreement and sale, which relates to the same  

subject-matter,  i.e.  the goods agreed to be sold and in which the  

property gets transferred. In another Constitution Bench decision of  

this Court in  The Commissioner of Commercial Taxes Mysore,  

Bangalore vs.  Hindustan Aeronautics Ltd. reported in (1972) 1  

SCC 395, it was again held that the answer to the question whether it  

is  a  works  contract  or  it  is  a  contract  of  sale  depends  upon  the  

construction  of  the  terms  of  the  contract  and  in  the  light  of  the  

surrounding circumstances. It will have to be further noted that the  

principles set down in the above Constitution Bench decisions were  

neither varied nor upset in any other judgment of equal  strength,  

though in  Larsen & Toubro Ltd. (supra) it has been stated that  

the ‘Dominant Nature Test’ laid down in State of Madras vs. M/s.

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Gannon Dunkerley and Co. (Madras) Ltd., AIR 1958 SC 560, no  

longer survives. In my humble view, it will  have to be stated that  

even  after  the  Constitutional  Amendment  introducing  Article  

366(29A)(b),  it  will  have  to  be  necessarily  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. I must also  

point out that this principle has also been emphasised in the decision  

of  Larsen & Toubro Ltd. (supra).  Therefore,  while  venturing to  

answer  the  question  referred  for  our  consideration,  the  various  

principles laid down in the Constitution Bench decisions have to be  

necessarily  kept  in  mind  to  state  whether  the  decision  in  Kone  

Elevators  (India)  Pvt.  Ltd.  (supra) will  prevail  or  the  one  in  

Larsen & Toubro Ltd. (supra) should be followed.

8.Before  referring  to  the  detailed  submissions  of  the  respective  

counsel,  since  the  substantive  submission  of  the  Counsel  for  the  

Petitioner centers around the contract between the Petitioner and its  

customers, which contains various terms and conditions, the same  

are to be noted in the forefront. With that in view, I wish to refer to  

the specimen documents relating to the supply of the elevators by  

the Petitioner for its customers. Annexure A1 consists of the order of

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acknowledgement  of  the  model,  details  of  the  benefits  of  the  

elevator to be supplied, the preparatory work to be carried out by the  

customer,  the  document  containing  price  variation  clause  and  

elevator  works  contracts,  the  general  conditions  of  Contract,  the  

acceptance document by both parties and the invoice raised along  

with the various bills  for purchase of the model items. A detailed  

reference to each one of the documents has to be noted in order to  

examine the question as to whether the manufacture,  supply and  

installation of LIFT by the Petitioner should be treated either as a  

‘Sale’ or ‘contract for work’.   

9.The above documents are found in Volume 1 of I.A. No. 2 of 2013.  

The details of the above documents are available in Annexure A-1,  

which are at pages 6 to 27. The first document is dated 23.12.2009,  

addressed to one of the customers of the Petitioner.   The subject  

column reads as under:

“Order  Acknowledgment  for  One  (1)  No.  OTIS  Electric  Traction  Passenger  Elevator  for  your  Building  at  “BAPU  NAGAR,  JAIPUR,  RAJASTHAN”.”  

10.In the body of the said letter, the order placed by the customer  

was acknowledged by referring to the acceptance of the Petitioner’s  

proposal for ‘SUPPLY’ and ‘INSTALLATION’ of one (1) No. OTIS Electric

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Traction Passenger Elevator for their building.  Along with the said  

letter,  a  copy  of  the  proposal  duly  approved  by  the  Petitioner’s  

authorized officer was also enclosed. The contract number allocated  

to the customer was also mentioned. The first document enclosed  

along with the said letter dated 23.12.2009, is a document dated  

21.10.2009,  containing  nine  pages  and  in  the  last  page  the  

signatures of the Petitioner and its customers were found affixed in  

proof of acceptance of the Petitioner’s offer to supply and installation  

of its elevator. 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.   

11.The first one is titled as Model Code, which contains the various  

details about the elevator to be supplied. Such details relate to the  

load  and  speed,  the  travel  and  rise  of  the  LIFT,  the  stops  and  

openings of the LIFT, the power supply requirement for its operation,  

the control aspect of the LIFT,  the nature of operation of the LIFT  

manual or automatic, the mechanical aspect of the LIFT, the size of  

the LIFT, the requirement of the hoist way for installing the LIFT, the  

various  panels  to  be  provided  in  the  LIFT  and  handrails  to  be  

provided inside the LIFT,  the nature of false ceiling,  the nature of  

flooring, the width of opening in the LIFT, the method of operation of

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the doors of the LIFT, the design of the signals, other details such as  

the type of Buttons at different levels of the LIFT, the type of LIFT car  

operating panel with Touch Screen facility, Battery operated alarm  

bell  &  emergency  light,  fireman’s  switch  at  main  lobby  and  one  

number colour LCD in the lobby. It also specifies the colour scheme  

of the LIFT and the shape of the LIFT.

12.The next page of the document is under the caption ‘A.C. Variable  

Voltage  Variable  Frequency  Control’.  In  the  said  document  

description of the machine, the brake system, the motor and other  

technological  details  have  been  set  out.  As  far  as  the  type  of  

machine  is  concerned,  various  details  about  the  operating  

mechanism,  which  is  part  of  the elevator  such as  motor,  electro-

mechanical brake, chromium molybdenum steel worm, bronze gear  

etc., have been mentioned. The brake system has been described as  

direct current brake with spring applied and electrically released and  

designed to provide for smooth stop under variable loads. As far as  

the motor is concerned, it is mentioned that the A.C. motor has been  

designed for elevator service, which will  have high starting torque  

with  low  starting  current.  That  apart,  the  advance  technological  

system, which is called as ‘Microprocessor Based Control’ that will be  

provided in the LIFT has been stated in detail. The details about the

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digital control provisions, other user friendly features included in the  

Microprocessor Based Control has also been furnished. It  is  finally  

mentioned in the said document that the system would continuously  

monitor  critical  aspects  of  system  health,  self-health,  diagnostic  

capabilities,  which  are  built  into  the  control  system to  speed  up  

trouble-shooting,  which  can  be  monitored  from  seven  segment  

display provided in the logic board and that it  will  facilitate quick  

identification of fault for restoration of normal operation.

13.The  next  page of  the document  annexed is  under  the caption  

‘Benefits of ACV F (Variable Voltage Variable Frequency Drive)’. This  

document  contains  10  specific  details,  namely,  (i)  smooth  and  

controlled  acceleration/deceleration,  (ii)  better  riding  quality,  (iii)  

assured leveling accuracy +/-  5 MM, (iv)  improved flight time,  (v)  

improved  reliability  &  increased  efficiency,  (vi)  reduced  power  

consumption about 50% and improved power factor,  (vii)  reduced  

heat  release,  (viii)  flexibility  of  programme  and  programming  of  

features at site, (ix) enhances the value of building, and (x) simplified  

maintenance.  A  cursory  glance of  the details  furnished under  the  

above 10 heads by way of benefits of the offered LIFT discloses the  

claim of the Petitioner as to the advantage that will be available to

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the customer in the event of ordering for supply of the said type of  

elevator.

14.The  next  page  of  the  document  is  under  the  caption  

‘Maintenance’. Under the head of ‘Maintenance’ it is mentioned as to  

from when the free maintenance for 12 months period as per the  

quotation  would  commence,  the  nature  of  inspection  and  

examination that would be carried out during the said period of 12  

months of free maintenance and the extent to which replacement of  

parts could be made free of cost, as well as on chargeable basis. It  

also specifies the exclusion of any special examination that may be  

carried out in between the monthly free examination dates, in which  

event,  the  exclusive  responsibility  would  be  of  the  Purchaser  as  

owner when once possession is handed over apart from the force  

majeure clause.

15.The next page of the document is under the heading ‘Preparatory  

Work’.  This document contains as many as 21 Clauses and at the  

very outset it is stipulated as ‘You Agree at your cost’. The nature of  

preparatory  work  set  out  in  the  said  21  Clauses  relates  to  the  

RESPONSIBILITY OF THE PURCHASER to furnish within two weeks or  

sooner if required from the date of acceptance of the proposal all the  

required  data  for  the performance of  the contract,  to  design  and

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furnish  a  properly  framed  and  enclosed  legal  ELEVATOR  HOIST  

WAY/STRUCTURE,  to furnish an ELEVATOR PIT of proper and legal  

depth below the lowest landing, to furnish properly lighted and FIRE  

PROOF  MACHINE  ROOM  of  sufficient  size  to  accommodate  the  

Petitioner’s equipment with other detailed specifications, to furnish  

and  install  necessary  HOIST  WAY  DOOR  FRAMES  and  allied  

provisions, to provide continuous SILL BEARING AREA for each hoist  

way  entrance  of  such  constructions,  to  do  all  painting  except  

elevator  material,  to  do  all  CUTTING  OF  WALLS,  floors,  partitions  

including grouting of all bolts, sills etc., to furnish REQUIRED POWER  

at  the top  floor  landing terminating  in  suitable  main switches  for  

power  and  light  circuits  with  allied  provisions,  to  furnish  LIGHT  

OUTLET POINTS at the middle of the hoist way and a light point in the  

pit, to be furnished during the erection of the elevators, ELECTRIC  

POWER SUPPLY of necessary characteristics to provide illumination  

and operation of tools and hoists etc., to guard and protect the hoist  

way, TO COMPLETE ALL THE WORKS IN SUCH SPECIFIED TIME so that  

no delay is caused in carrying out the installation by the Petitioner, to  

relieve  the  Petitioner  of  any responsibility  in  respect  of  expenses  

relating to power supply or expenses of any nature relating to the  

rest of the building and other contractor’s work, to pay all fees that

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may be required in connection with erection of preparation of the  

structure in which the elevator equipment is to be erected including  

any general permit/certificate fees, usually billed by the Government  

Agency  licence  fee  etc.,  to  PROVIDE  SCAFFOLDING  for  erector’s  

requirement  in  the elevator  hoist  way,  during  the erection  period  

AND FOR ITS REMOVAL thereafter and in the event of the elevator  

hoist way being more than 40 meter height, such scaffolding should  

be in steel structure by OTIS, to provide suitable weatherproof lock-

up storage accommodation of approximately 50 sq.mt. per elevator  

at the ground floor level near the hoist way, to provide and maintain  

adequate safety and security measures, as also retain OTIS safety  

infrastructure to prevent any injury to third party or damage, theft or  

pilferage of material during erection period till the installed LIFT is  

handed over, to provide hoisting beam in the machine room ceiling  

and  rolled  steel  sections  with  bearing  plates  for  support  of  the  

machine  if  required,  to  provide  acceptable  living  accommodation  

with facilities such as light, running water, sanitary for the erection  

crew at or near the site and to indemnify and SAVE THE PETITIONER  

HARMLESS  AGAINST  ALL  LIABILITY  GROWING  OUT  OF  THE  

PURCHASER’S FAILURE TO CARRY OUT ANY OF THE FOREGOING. Out  

of the above 21 items, the aspects for which Petitioner takes the

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responsibility are the provision of a ladder in a pit, provision of steel  

fascia  by OTIS in respect  of  S.  No.6 and the provision relating to  

scaffolding.  It  also  states  that  the  clause  relating  to  provision for  

living accommodation is not applicable. The rest of the works to be  

carried out relating to provision of a HOIST, which is otherwise also  

called as ‘Well’ for erecting the LIFT has been entirely fastened on  

the  Purchaser.  It  is  also  relevant  to  note  that  under  the  heading  

‘Preparatory Work’, major responsibility has been entrusted with the  

Purchaser for providing the HOIST/WELL, which relates to both prior  

to the erection of the LIFT, as well as in the course of the erection of  

the LIFT.

16.The next page of the document is under the caption ‘IEEMA Price  

Variation Clause for Elevator Works Contracts’. It is described therein  

that  the  price  quoted/confirmed  is  based  on  the  cost  of  raw  

materials/components and labour costs as on the date of quotation  

and  the  same is  deemed  to  be  related  to  Wholesale  Price  Index  

Number  for  Metal  Products  and All  India  Average Consumer Price  

Index  Number  for  Industrial  Workers  as  specified  in  the  said  

document and that in case of any variation in the index numbers, the  

price would be subject to adjustment up or down in accordance with  

the  formula.  Though,  a  formula  is  set  out  in  the  said  document,

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based on enquiries with the counsel appearing for the Petitioner, it is  

revealed that the said formula is a formal one and is never applied  

for the purpose of determining the cost. For the purpose of working  

out  the formula,  the details  of  various abbreviations noted in  the  

formula are furnished. Inasmuch as it was informed to this Court that  

the formula as a matter of practice is not worked out, there is no  

need to go into the details of those abbreviations mentioned in the  

formula.  There are two notes,  namely,  Note 1 and Note 2 at  the  

bottom of the said document, which states that the sole purpose of  

the above stipulation is to arrive at the amount of the entire contract  

under  the  various  situations  and  the  above  stipulations  do  not  

indicate  any  intentions  to  sell  materials  under  this  contract  as  

movables. Note No.2 states that the indices MP and WO are regularly  

published  by  IEEMA  in  monthly  basic  price  circulars  based  on  

information  bulletins  from  the  authorities  mentioned  and  those  

indices would be used for determining price variation and only IEEMA  

circulars  would  be  shown  as  evidence,  if  required.  Another  very  

important clause stated in the said document is ‘Payment Terms’,  

which reads as under:      

“Under this clause claim for manufactured materials shall be  paid along with our material invoice and claim for installation  labour shall be paid along with our final invoice.

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Firm prices: The prices quoted in this proposal will be firm  upto  5/5/10.  Thereafter  for  any  delay  in  completion  of  installation and commissioning due to reasons attributable  to  your  goodselves  prices  will  be  adjusted  in  accordance  with the above clause.”

17.Therefore, it is quite apparent that there is no relevance to the  

subtitle,  namely,  ‘Elevator  Works  Contract’  mentioned  in  the  said  

page of the document. The only relevant aspect which is required to  

be noted is  that  in  the  event  of  price  variation  due to  the  delay  

attributable to the Purchaser, the labour cost and the material cost  

would be worked out based on the prevailing Consumer Price Index  

Number for Industrial Workers and Wholesale Price Index Number for  

Metal Products. In other words, there is no significant relevance for  

the subtitle and the various details mentioned in the said page of the  

document.

18.The  next  page of  the  document  is  a  very  relevant  document,  

which is in two pages, which carries the title ‘Conditions of Contract’.  

As  many  as  27  conditions  have  been  stipulated.  In  order  to  

appreciate the stand of the Petitioner and to arrive at a conclusion  

whether the contract of supply of erection can be construed as ‘Sale’  

or ‘Works Contract’, the conditions have to be necessarily examined  

in  detail.  The  first  condition  mentions  that  the  quotations  are

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effective for 30 days from the date of proposal and thereafter, are  

subject to change without notice. The second condition pertains to  

the  various  circumstances  under  which  the  Petitioner  would  be  

entitled  to  vary  the  price  as  per  ‘IEEMA  Price  Variation  Clause’  

inasmuch as the price quoted would be valid for 52 weeks from the  

date  of  acceptance  of  the  proposal.  Condition  No.3  also  is  an  

ancillary  stipulation  relating  to  the  application  of  Price  Variation  

Clause as per ‘IEEMA Price Variation Clause’.  Condition No.4 again  

shifts the burden on the Purchaser to furnish the Petitioner within  

two weeks  from the date of  the agreement,  all  required data  for  

performance  of  the  contract,  that  the  PURCHASER  TO  AGREE  TO  

PREPARE THE HOIST WAY STRUCTURE and make it ready with proper  

electric  power  supply  as  per  the  required  data  to  enable  the  

Petitioner to have uninterrupted use for installation and adjustment  

of the elevator. It also mentions that if the electric power supply is  

not  provided,  the  installation  of  the  equipment  would  still  be  

completed and the Purchaser should be prepared to take over the  

elevator  and  make the  payment  as  they  fall  due.  Condition  No.5  

consists  of  the  payment  schedule  and  also  a  default  clause.  The  

payment schedule is  90% on acceptance of  the proposal  and the  

balance 10% by way of final payment either on commissioning or in

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the event of delay by any cause beyond the control of the Petitioner,  

which is to be paid within 90 days from the date the materials are  

ready for  dispatch.   In  the  event  of  any fault  on the part  of  the  

Purchaser in making the Preparatory Work unavailable to enable the  

Petitioner to carry out the installation, such as defects in the hoist  

room or for any other lapse, the option is retained by the Petitioner  

to discontinue the work or withhold the release of completed elevator  

subject however, to charge of over payments to be charged at the  

rate  of  1.5% per  month  of  the  agreed  price.  It  also  entitles  the  

Petitioner to reschedule the erection time depending upon the delay  

caused at the instance of the Purchaser. Condition No.6 relates to  

the  provision  to  be  made  by  the  Purchaser  for  the  stay  of  the  

employees of the Petitioner who are assigned the task of erection of  

the LIFT. Condition No.7 relates to the work timings and in the event  

of the employees of the Petitioner were to work overtime based on  

mutual agreement with the Purchaser, such overtime charges should  

be  borne  by  the  Purchaser.  Condition  No.8  is  a  mutual  FORCE  

MAJEURE  clause  as  between  both  the  parties.  Condition  No.9  

specifies  that  the  title  to  each  elevator  would  pass  on  to  the  

Purchaser  when  payment  for  such  elevators  are  fully  paid  to  the  

Petitioner  and  in  the  event  of  default  being  committed  by  the

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Purchaser, the right of the Petitioner to retrieve the elevator in full or  

in part and also its right to recover from the Purchaser, the value of  

the  elevator  supplied,  can  be  initiated  by  appropriate  legal  

proceedings.  Condition No.10 mainly  uses the expression that  the  

contract should be deemed to be an INDIVISIBLE WORKS CONTRACT  

though the cost of labour involved and the price of movables could  

be  specifically  ascertained.  Condition  No.11  is  prescription  of  the  

defect liability period, which would be 18 months from the date of  

initial supply of materials or 12 months from the date of completion  

of the erected elevator, whichever is earlier.  The default clause is  

that such agreed warranty period would apply for normal wear and  

tear  only  and  if  any  repair  or  damage  would  occur  due  to  any  

unauthorized  person’s  handling,  such  warranty  would  not  be  

applicable. Condition No. 12 relates to any work to be carried out for  

the purpose of erection of an elevator due to statutory prescription  

and according to the Petitioner that would be the responsibility of the  

Purchaser and if for any reason the Petitioner is to carry out such  

works,  extra  cost  would  be  charged  on  the  Purchaser.  Condition  

No.13 pertains to any changes, modifications, additions, deletion or  

extra  work  involved  in  which  event  the  cost  escalation  would  be  

mutually agreed between the parties and finalized. As per Condition

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No.14, the Petitioner wants to call the Contract as indivisible Works  

Contract and states that the materials such as packing cases, left  

over materials, tools tackles, instruments, etc., brought to site by the  

Petitioner would remain the property of the Petitioner and also its  

right  to  sub-contract  any  of  the  work  which  it  deems  fit.  Under  

Condition  No.15,  the  Petitioner  wants  to  make  it  clear  that  any  

descriptive  matter,  drawings  or  illustrations  brochures  furnished  

along with its proposal are not accurate but are approximate.  Under  

Condition  No.16,  it  is  made  clear  that  the  specifications  of  the  

Petitioner  will  be  the  one which  can be relied  upon even if  such  

specifications varied with the requirements made by the Purchaser  

prior  to the Contract.  Condition No.17 is  again a FORCE MAJEURE  

clause.  Under Condition No.18,  the Petitioner wants  to  reserve its  

right to effect the supply either from its factory at Karnataka or from  

any  other  place  in  India  or  by  importing  the  LIFT  from a  foreign  

country. Condition No.19 is the provision under which the Petitioner’s  

right  to  claim  compensation/damages  in  the  event  of  breach  of  

contract at the instance of the Purchaser. Condition No.20 provides  

for settlement of the disputes by way of conciliation at the bipartite  

level and on its failure to go in for Arbitration. Condition No.21 refers  

to the manner in which the apportionment over the expenses of the

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contract relating to the amount or advances paid by the Purchaser,  

which  would  be  determined  by  the  Petitioner  and  that  the  same  

cannot be questioned by the Purchaser even before the legal forums.  

As  per  Condition  No.22,  the  proposals  when  accepted  by  the  

Purchaser,  the  same would  supersede  all  other  earlier  proposals,  

representations  etc.  Condition  No.23  clarifies  that  in  order  to  

authenticate any change in the conditions of the contract after the  

signing of the contract, the same can be done only by the authorized  

person from the Head Office of the Petitioner. Condition No.24 states  

that  the  contract  could  be  deemed  to  be  concluded  at  

Mumbai/Delhi/Calcutta/Bangalore after allocation of the contract by  

the  Petitioner.  Clause  25 specifies  the  delivery  time and erection  

time  and  that  the  completion  of  the  installation  would  be  made  

within 16 weeks from the date of the receipt of the order, advance  

payment,  layout  approval  and  settlement  of  all  technical  details,  

whichever is later. It however, reserves the Petitioner’s right to vary  

the delivery and the erection schedule depending upon any delay  

being caused at the instance of the Purchaser in carrying out the  

Preparatory Works as per the contract. Condition No.26 is again a  

default clause for escalation of the cost of labour in the event of the  

Petitioner  withdrawing  the work force for  no  fault  of  its.  The  last

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Condition No.27 shifts the entire responsibility on the Purchaser for  

getting  necessary  certificates/permits/licenses  from  the  

Statutory/Regulatory Authorities, including payment of all necessary  

fees for such certificates/licenses/permits etc. and that the Petitioner  

will not be in anyway liable for any delay occurring on that score.

19.The last page of the document, which is also dated 21.10.2009,  

disclose the signature affixed by the Authorized Official/Signatory of  

the Petitioner and the Purchaser wherein, the price of the elevator to  

be supplied in a sum of Rs.12,50,000/- is quoted. In the said page,  

applicable rate of Excise Duty, Service Tax and other statutory tax  

liabilities  to  be  incurred  are  all  mentioned.  Along  with  the  above  

document,  the  payment  of  Rs.12,12,500/-  already  made  by  the  

Purchaser,  as  well  as  the final  invoice raised for  value of  the full  

amount, namely, Rs.12,50,000/- is also enclosed.  

20.Before adverting to the other statutory provisions, which are to be  

noted  while  dealing  with  the  issue  involved,  as  well  as  the  

submissions made by either side, it will be appropriate to sum up the  

nature of the contract that is normally transacted by the Petitioner  

with its customers, based on the above Annexure A-1. From what has  

been noted from the said Annexure, the following facts emerge:

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(a) Every  supply  and  erection  of  an  elevator  by  the  

Petitioner is always preceded by a proposal furnishing the  

requirement  of  the  customer.  The  model  of  the  LIFT  

specifying its  capacity  load,  technical  aspects  and other  

minute  details  relating  to  the LIFT  to  be supplied  along  

with  the works  to  be carried  out  at  the instance  of  the  

Purchaser to enable the Petitioner to supply and erect the  

LIFT are also furnished.

(b) Based  on  the  proposal  of  the  Petitioner,  once  the  

order is placed by the Purchaser by way of acknowledging  

the said order, specific communication is issued furnishing  

a distinct contract number. In the said acknowledgment of  

order, the entire set of documents relating to the proposal  

and  the  signed  contract  is  also  enclosed  with  the  price  

agreed between the parties.

(c) The documents found in the ultimate agreed contract,  

therefore, contain the details relating to the model and the  

mechanical details about the operation of the LIFT, which  

are furnished with detailed particulars.

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(d) The various details contained in the proposal are all  

mainly related to the nature of the LIFT to be supplied and  

as to how the technology involved in the LIFT would be  

advantageous  to  the  customer  when  it  is  ultimately  

erected and put into operation.

(e) The  details  of  the  Preparatory  Work  is  one  of  the  

relevant aspects of the contract, which disclose that at the  

site,  where  the  LIFT  is  to  be  installed,  the  entire  

Preparatory Work is to be carried out by the customer such  

as, the setting up of the hoist way/structure, elevator pit,  

fire proof machine room, hoist way door frames, provision  

of  sill  bearing area,  all  cutting of  the walls,  provision of  

required  power  supply,  furnishing  of  light  outlet  points,  

provision of elevators electric  power supply,  provision of  

required  accommodation  for  the  work  force  of  the  

Petitioner and above all, the time within which the above  

works have to be carried out by the customer. As part of  

the Preparatory Work, the only area where the Petitioner  

comes forward to take the responsibility are the provision  

of a ladder in a pit, the provision of a steel fascia and the  

provision relating to scaffolding.

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(f) As far as the price variation clause is concerned, it  

only states that in the event of any delay being caused not  

due to the fault of the Petitioner, the price variation of the  

labour cost and material cost would depend upon the All  

India Average Consumer Price Index Number for Industrial  

Workers  and  Wholesale  Price  Index  Number  for  Metal  

Products.

(g) The  specific  condition  imposed  in  the  prescription  

contained under the heading ‘Preparatory Work’ makes it  

clear that only after the customer satisfactorily completes  

all the basic works such as, erection of the hoist/structure  

and  other  allied  necessary  works,  the  Petitioner  would  

commence its installation. In the event of any delay being  

caused  at  the  instance  of  the  customer,  the  

commencement of the installation would get postponed at  

the risk of the customer.

(h) Though, in the conditions of contract the expression  

used in condition number 10 is ‘indivisible works contract’  

the reading of as many as 27 conditions disclose that it  

only highlights the overall responsibility of the customer to  

undertake  the  main  work  of  providing  a  solid

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hoist/structure to enable the Petitioner to bring its LIFT and  

fix  it  in  the  said  earmarked  place  with  all  the  other  

provisions  readily  made  available  by  the  Purchaser,  

including the electric points.

(i) As per condition No.5 of the conditions of contract,  

90%  of  the  value  is  to  be  paid  on  acceptance  of  the  

proposal.  Balance  10%  payment  is  payable  either  on  

commissioning or in the event of any delay being caused  

and not attributable to the Petitioner, within 90 days of the  

materials relating to the LIFT to be supplied being made  

and kept ready for dispatch. Therefore, the said condition  

is  required  to  be  examined  in  detail  to  ascertain  as  to  

whether  the  payment  schedule  really  determines  the  

nature of the contract.  

21.Having noted the above salient features of the contract relating to  

the supply and erection of the LIFT by the Petitioner, to which I will  

discuss in detail in the latter part of this judgment, I wish to refer to  

the statutory provisions which are required to be noted at this stage.  

Mr.  Salve,  learned  Senior  Counsel   in  his  submissions  drew  our  

attention  to  various  statutory  provisions  relating  to  LIFTS,  which  

provide  for  charging  of  duty  under  the  provisions  of  the  Central

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Excise Legislation as well as the provisions brought out by various  

States for charging tax on supply and installation of LIFTS construing  

the same as ‘Works Contract’ and the subsequent changes brought  

about after  the decision of  this  Court  in  Kone Elevators (India)  

Pvt.  Ltd.  (supra),  besides  the  Constitutional  provision,  namely,  

Article 366(29A)(b) of the Constitution.

22.Under Article 366(29A), tax on the sale or purchase of the goods  

is  defined  and  the  concerned  sub-clause  (b)  of  sub-Article  (29A),  

reads as under:

“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;”

23.This clause was inserted under the Constitution 46th Amendment  

Act of 1982. A reading of the said sub-clause (b), which is a part of  

various  other  definitions  under  Article  366,  would  enable  the  tax  

levying authorities to levy tax on the transfer of property in goods  

involved in the execution of a ‘Works Contract’. In order to apply the  

said  sub-clause (b),  in  the foremost,  what  is  to  be ascertained is  

whether  there  is  a  ‘Works  Contract’  and  while  executing  such  a  

‘Works  Contract’  any  transfer  of  property  in  goods  are  involved,  

whether  as  goods  or  in  some other  form on which  a  tax  can be  

validly levied by the concerned authorities.

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24.Having noted the constitutional mandate provided therein, it will  

be beneficial to refer to the other statutory prescriptions brought to  

our notice. Mr. Salve, learned Senior Counsel brought to our notice  

the definition of ‘Works Contract’  under Section 2(jj)  of the Orissa  

Sales Tax Act, 1947. The said provision reads as under:

“works contract includes any agreement for carrying out for  cash or deferred payment or other valuable consideration ,  the  building,  construction,  manufacture,  processing,  fabrication,  erection,  installation,  fitting out,  improvement,  modification,  repair  or  commissioning  of  any  movable  or  immovable property.”

25.It was also brought to our notice certain provisions in the Bombay  

Lifts Act, 1939. The relevant provisions are Sections 3(c),(d),(e)&(f),  

which defines ‘Lift, Lift Car, Lift Installation and Lift way’. Section 4  

stipulates that every owner of a place intending to install a LIFT after  

the commencement of the said Act, should make an application to  

the concerned authority of the State Government for permission to  

erect  such  a  LIFT  and  while  seeking  for  such  a  permission,  the  

obligation is on the applicant to furnish the various details about the  

LIFT to be erected. Section 5 deals with the licence to be obtained to  

use a LIFT, which states that every owner of a place who is permitted  

to  install  a  LIFT  under  Section  4  should  within  one  month  after  

completion of the erection of such LIFT, inform the Authorized Officer

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of the State Government who has been empowered to issue a licence  

for the working of the LIFT. Such intimation about the erection of the  

LIFT and the nature of licence to be issued in the prescribed format  

has been specified. The required fee to be paid is also mentioned in  

the said section. Section 7 specifies that no LIFT should be operated  

without a licence. The corresponding rules, namely, Rules 3, 5, 6, 9  

and 9(a), as well as Form A has also been referred. In furtherance of  

Sections, 4, 5, 6 and 7 of the Bombay Lifts Act, 1939 and the Bombay  

Lifts  Rules,  1958,  namely,  Rules  3,  4,  5,  6,  9  and  9(a),  what  is  

specified is the detailed procedure to be followed by approaching the  

concerned authorities initially for the erection of the LIFT by getting a  

permission and securing a licence after successful installation of the  

LIFT and the periodical inspection to be carried out in order to ensure  

that  the  LIFT  erected  does  not  cause  any  damage  to  men  and  

materials due to any defect in the material used while installing the  

LIFT, as well as in its future operation on regular basis, as well as in  

the  course  of  its  maintenance.  Rule  9A(5)  prescribes  the  fee  for  

issuing a licence to LIFT contractors for permission, while issuing the  

licence for prescribed number of LIFTS. Apart from the above rules,  

Form A is the prescribed form by which an application for permission  

to install a LIFT or for making any addition or alteration to the LIFTS

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is to be made. The details to be furnished in the said form includes  

the  name  of  the  owner,  the  name  of  the  person  who  would  be  

installing the LIFT, the place where the LIFT would be installed and  

some basic  details  about the LIFT which  is  to  be installed.  Under  

Form A-1, the LIFT installation contractor has to make a declaration  

as to the successful installation of the LIFT undertaken by it.

26.Reference to the above provisions contained in the Bombay Lifts  

Act  and Rules  show that  before  erection  of  LIFT  in  the premises,  

necessary  permission  has  to  be  obtained  from  the  concerned  

authority appointed by the State Government. By making a specific  

application for permission for the erection of a LIFT and secure a  

licence when a LIFT is erected, thereafter also periodical intimation is  

to be sent to the concerned authority about the proper maintenance  

of the LIFT, which has been erected in the premises of the owner.  

The underlining requirement of the statute is apparently to ensure  

that such a LIFT installed in a premises, which would be regularly  

used by the persons visiting the said premises should not endanger  

their lives either due to any defects in the installation or its operation  

or in its maintenance after its installation. Therefore, reference to the  

above provisions  in  my view is  not  decisive  for  finding out  as  to

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whether the manufacture, supply and installation of a LIFT would fall  

within the expression ‘Works Contract’ or not.

27.Mr. Salve, learned Senior Counsel in his submissions also made  

reference to the definition ‘Commissioning and Installation Agency’  

and ‘Taxable  Service’  under  Section 65(29)  and (105)(zzd)  of  the  

Finance  Act,  1994  as  was  brought  out  w.e.f.  14.05.2003  and  

subsequently w.e.f. 10.09.2004 and 16.06.2005. In fact, the learned  

Senior  Counsel  also  referred  to  the  definition  of  ‘Erection,  

Commissioning and Installation’ as was inserted as sub-section (39a)  

to Section 65 by the Finance Act (No.2) of 2004 w.e.f. 10.09.2004.  

The definition of the above provisions were made w.e.f. 16.06.2005.  

Lastly, learned Senior Counsel brought to our notice the definition of  

‘Taxable Service’  under  sub-clause (zzzza)  to  sub-section (105)  of  

Section  65,  which  was  inserted  by  the  Finance  Act,  2008  w.e.f.  

16.05.2008. The said provision reads as under:

“105 – Taxable Service means any service provided,-

“(zzzza)   to  any  person,  by  any  other  person  in  relation  to  the  execution of a works contract, excluding works contract in respect of  roads,  airports,  railways,  transport  terminals,  bridges,  tunnels  and  dams.

Explanation-For  the  purposes  of  this  sub-clause,  “works  contract”  means a contract wherein-

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(i) Transfer  of  property  in  goods  involved  in  the  execution  of  such contract is leviable to tax as sale of goods, and

(ii) Such contract is for the purposes of carrying out,-

(a) erection,  commissioning  or  installation  of  plant,  machinery,  equipment  or  structures,  whether  pre- fabricated  or  otherwise,  installation  of  electrical  and  electronic  devices,  plumbing,  drain  laying  or  other  installations for transport of fluids, heating, ventilation or  air-conditioning  including  related  pipe  work,  duct  work  and  sheet  metal  work,  thermal  insulation,  sound  insulation,  fire  proofing  or  water  proofing,  lift  and  escalator, fire escape staircases or elevators; or

(b) construction of a new building or a civil  structure or a  part thereof, or of a pipeline or conduit, primarily for the  purposes of commerce or industry; or

(c)construction  of  a  new  residential  complex  or  a  part  thereof; or  

(d) completion  and  finishing  services,  repair,  alteration,  renovation or restoration of, or similar services, in relation  to (b) and (c) or  

(e) turnkey projects including engineering, procurement and  construction or commissioning (EPC) projects:”  

28.Before referring to the details of the above provisions brought to  

our  notice,  it  is  relevant  to  mention  at  this  juncture  the  specific  

prayers of the Petitioner in the leading case W.P.(C) No.232 of 2005  

and  W.P.(C)  No.  548  of  2008.  In  W.P.(C)  No.232  of  2005,  the  

Petitioner seeks to challenge the impugned notices dated 30.03.2005

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by which the First Respondent wanted to re-open the assessment for  

the  Assessment  Years  1999-2000  (C.S.T.  No.  631067/1999-2000)  

under the Central Sales Tax Act and again for the years 1999-2000  

(TNGST  No.  1340636/99-2000),  and  2000-2001  (TNGST  No.  

1340636/2000-01)  under  the  Tamil  Nadu  General  Sales  Tax  Act,  

1959.  Similarly,  in  W.P  No.548  of  2008,  the  challenge  is  to  the  

revised pre-assessment notices dated 23.06.2006 for the assessment  

period  2002-2003 and 03.04.2008 for  the Assessment  Year  2001-

2002, issued by the Third Respondent and the Second Respondent  

respectively. Keeping the said challenges in mind, the provisions will  

have to be examined.  As has been stated in the opening part of this  

Judgment, the answer to the question referred to us will have to be  

made, keeping in mind the statutory provisions relating to charging  

of tax vis-à-vis the impact of Article 366 (29A)(b) of the Constitution.

29.Sub-section (29) of Section 65 of the Finance Act, 1994 defines  

what is ‘Commissioning and Installation Agency’ providing services in  

relation to commissioning and installation. Sub-clause (zzd) to sub-

section (105) of Section 65 defines the ‘taxable service’ to mean any  

service provided to a customer by a commissioning and installation  

agency in relation to commissioning or installation.  These definitions

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relating to taxable service of commissioning and installation agency  

as was prevailing w.e.f. 14.05.2003, were general and there was no  

specified category or class of service referred to therein. With effect  

from 10.09.2004, there was an addition made in sub-section (29) of  

Section 65 by which while defining a ‘commissioning and installation  

agency’, the expression ‘erection’ came to be added.  A further sub-

section, namely, sub-section 39(a) was also introduced by Finance  

Act  (No.2)  of  2004  w.e.f.  10.09.2004,  which  further  defined  the  

expression  ‘erection,  commissioning  or  installation’  to  mean  any  

service  provided  by  a  commissioning  and  installation  agency  in  

relation to erection, commissioning of installation of plant, machinery  

or equipment. Consequently, in sub-section 105(zzd) the expression  

‘erection’  was  added  along  with  the  other  expressions  

‘commissioning  or  installation’,  which  was  again  to  operate  w.e.f.  

10.09.2004.  The  above  definition  relating  to  ‘commissioning  and  

installation agency’ under sub-section (29) of Section 65 continued  

even w.e.f. 16.06.2005. However, in sub-section 39(a) of Section 65  

while defining ‘erection, commissioning or installation’, an elaborate  

definition  came  to  be  introduced  as  per  which  the  expression  

‘erection,  commissioning  or  installation’  would  mean  any  service  

provided  by a  commissioning  or  installation  agency  in  relation  to

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installation of  among other classes of service included under sub-

clause  (ii)(e)  LIFT  and  ESCALATOR,  fire  escape  staircases  or  

travelators or such other similar services, which came into operation  

w.e.f. 16.06.2005. However, the definition of Taxable Service under  

sub-section 105(zzd) remained unaltered.  

30.Chapter V under the caption ‘Service Tax’ of the ‘Finance Act’,  

1994 underwent a further change wherein a sub-clause (zzzza) to  

sub-section 105 came to be added, which while defining a ‘taxable  

service’  to  any  person  by  any  other  person  in  relation  to  the  

execution of ‘Works Contact’ excluding ‘Works Contract’ in respect of  

roads,  airports,  railways,  transport  terminals,  bridges,  tunnels  and  

dams, specifically brought out an explanation for the purpose of the  

said sub-clause,  in  and by which,  the expression ‘Works Contract’  

came to be defined for the first time. As per the said definition, it  

meant that a transfer of property in goods involved in the execution  

of such contract would be leviable to tax as sale of goods and to  

ascertain whether the said contract is a ‘Works Contract’, it went on  

to State that such contract should be for the purpose of carrying out  

inter alia for the erection, commissioning or installation of LIFT and  

Escalator, fire escape staircases or elevators. It is very relevant to  

note that this definition of ‘Works Contract’ by way of an explanation

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to sub-clause (zzzza) to sub-section (105) of Section 65 came to be  

introduced for the first time w.e.f. 16.05.2008.  

31.Therefore, while examining the question referred to this Bench in  

the order of reference dated 12.05.2005, in an attempt to answer the  

said reference, it will have to be necessarily noted at the very outset  

that  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 Finance Act, 1994 w.e.f. 16.05.2008 for the purpose of  

Service Tax. However, the question still remains whether the same  

would hold good for levy of Sales Tax on the anvil of Article 366(29A)

(b) of the Constitution read along with the provisions of the Sales Tax  

Act  and  that  to  for  the  period  prior  to  the  said  date,  namely,  

16.05.2008. As noted by us, in the Writ Petitions, the challenge is to  

the revised pre-assessment notices under the Central Sales Tax Act  

or  under  the  respective  State  General  Sales  Tax  Act  for  the  

assessment  periods  related  to  the  years  1999-2000,  2000-2001,  

2001-2002 and 2002-2003.  Therefore, the question for consideration  

is what is the legal position with reference to the nature of contract  

of  the  Petitioner  vis-à-vis  its  Purchaser  with  reference  to  

manufacture, supply and installation of LIFTS. Based on the terms of

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the specific contracts, a specimen copy is placed before us vis-à-vis  

the relevant statutory provisions which are in existence during the  

relevant years.

32.Other statutory provisions which are relevant to be noted while  

construing the definitions prior  to 16.05.2008 are sub-clause (29),  

(39a) and (105)(zzd) of Section 65. Service Tax was levied at the rate  

of 12% for the value of the ‘taxable services’ referred to under sub-

clause (zzd)  of  sub-section (105)  of  Section 65.  After  16.05.2008,  

under the amendments introduced by Finance Bill No.2 of 2009, the  

charge of service tax underwent a change and the rate was brought  

down  to  5% of  the  value  of  taxable  services  referred  to  in  sub-

clauses (zzd) and (zzzza) of sub-section (105) of Section 65.

33.Having noted the above statutory provisions, we are now again  

mandated to examine the question as to whether the manufacture,  

supply and installation of LIFTS by the Petitioner would fall within the  

expression  ‘Works  Contract’  or  ‘Sale’.  For  examining  the  said  

question,  a  recapitulation  of  the  various  details  has  to  be  noted  

based on the specimen contract that came into existence as between  

the  Petitioner  and  the  Purchaser.  A  detailed  reference  has  been  

made to the salient features of  the said contract  and I  have also  

highlighted  the  terms  contained  therein.  There  was  a  detailed

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description of the product to be supplied by the Petitioner, namely,  

the LIFT to its Purchaser. The description about the product content  

with very many minute details relating to the model, the capacity it  

would  carry,  namely,  the  number  of  passengers,  the  weight,  the  

sophisticated  equipments  such  as  feather  touch  buttons,  highly  

precisioned stop facility at each floor of its operation, the smooth  

sailing  of  the  LIFT  in  between  different  floors,  the  other  safety  

gadgets  provided  in  the  LIFT  and  so  on.   Thereby,  what  was  

highlighted in one part  of  the contract  was the advantage that  a  

customer  would  get  when  the  Petitioner’s  LIFT  is  purchased  and  

erected  in  its  premises.  In  the  other  parts  of  the  contract,  the  

obligation of the Purchaser was to provide certain facilities such as  

hoist  way,  power  supply,  procurement  of  permits,  licences,  etc.  

under certain other enactments, the payment schedule with the time  

schedule along with the default clauses are stipulated. There are also  

provisions in the contract relating to the time within which the LIFT  

will be commissioned, namely, within 52 weeks and if for any reason  

any delay is caused beyond the control of the Petitioner, even then  

there would be a requirement  of  making the full  payment by the  

Purchaser  to  the Petitioner.  This  is  on the Petitioner  informing its  

readiness  with  the  materials  of  the  LIFT  to  be  commissioned

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available at the premises of the Petitioner with no obligation for its  

commissioning. Also a period of 90 days is stipulated for effectuating  

the final payment.  

34.The arguments on behalf of the Petitioners was mainly addressed  

by Mr.  Salve,  learned  Senior  Counsel.  In  his  submissions,  learned  

Senior  Counsel  contended that  after  the  decision  of  this  Court  in  

Kone Elevators (India) Pvt. Ltd. (supra), the various States who  

were earlier  contending that  supply and erection of  a LIFT was a  

‘Works  Contract’,  took  a  diametrically  opposite  view  and  started  

contending  that  the  said  contract  will  amount  to  ‘Sale’  and  not  

‘Works Contract’. The learned Senior Counsel drew our attention to  

some of the counter affidavits filed on behalf of the State of U.P.,  

Andhra  Pradesh  and  Karnataka  in  Writ  Petition  No.232  of  2005,  

wherein  such  a  stand  has  been  taken  by  the  respective  State  

Governments.  The  learned  Senior  Counsel  by  referring  to  the  

definition of ‘Works Contract’ under Section 2(jj) of the Orissa Sales  

Tax Act, 1947, which has been extracted in the earlier part of this  

Judgment,  submitted  that  the  manufacture,  supply  and  

erection/installation of a LIFT squarely falls within the said definition  

of ‘Works Contract’ and, therefore, the stand of the Petitioner is well-

founded. In support of his submissions, the learned Senior Counsel

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also  relied  upon the  Division  Bench  decision  of  the Bombay High  

Court  in  OTIS  Elevators  Co.  (India)  Ltd. vs.  The  State  of  

Maharashtra reported in [1969] 24 STC 525.

35.The  learned  Senior  Counsel  then  referred  to  the  Standard  

Contract  Form  of  the  Petitioner,  as  well  as  the  Field  Installation  

Manual and contended that the various works to be carried out in the  

course  of  installation  of  a  LIFT  can  only  be  held  to  be  a  ‘Works  

Contract’. By doing so, he drew our attention to the Field Installation  

Manual, which is meant for its field staff at the time of erection of the  

LIFT to follow the various instructions and the manner in which the  

LIFT is to be assembled at the premises of the Purchaser. By making  

reference to the said manual, which contains very many details as to  

the  various  parts  of  the  LIFT  and  how  these  parts  are  to  be  

assembled and also the safety measures to be followed, submitted  

that such an elaborate process involved in the assembling of the LIFT  

is  nothing but a contract  for work and not for sale.  He therefore,  

contended that the decision in  Kone Elevators (India) Pvt. Ltd.  

(supra) has to be varied.  

36.The learned Senior Counsel in his submissions further contended  

that in the light of the prescription contained in sub-Article 29A(b) of  

Article 366 of the Constitution and having regard to the nature of

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operation/function in the supply and installation of a LIFT, the said  

activity cannot be called as a mere ‘Sale’ but can only be called as a  

‘Works Contract’.  

37.The learned Senior Counsel also relied upon the decision in State  

of Madras vs. Richardson Cruddas Ltd. reported in [1968] 21 STC  

245  in  support  of  his  submissions.  By  referring  to  the  provisions  

contained in the Bombay Lifts Act, 1939 in particular Sections 3, 4, 5  

and 7 and Rules 3, 5, 6, 9 and 9A along with Form A1, the learned  

Senior Counsel contended that the said provisions in the Acts and the  

Rules, also goes to show that the installation of a LIFT, having regard  

to the nature of the activity and the functions involved can only be  

held  to  be a  ‘Works  Contract’  and not  a  ‘Sale’.  According  to  the  

learned Senior Counsel, the contract being an indivisible contract for  

supply and erection of the LIFT to the customer and the erection part  

of it is so intertwined with the supply of the LIFT, the contract can  

only be construed as ‘Works Contract’ and not a ‘Sale’.   

38.The  learned  Senior  Counsel  also  relied  upon a  decision  of  the  

Government  of  India  in  In  re:  OTIS  Elevator  Co.  (India)  Ltd.  

(1981) ELT 720 in support of his submissions. That was a decision of  

the Government of India in an appeal filed by OTIS Elevator Company  

under  the  provisions  of  the  Central  Excise  Act,  wherein  it  was

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contended that erection and installation of elevators and escalators  

were indivisible ‘Works Contract’ and do not constitute contracts for  

mere  sale  of  goods.  While  dealing  with  the  said  submission,  the  

above decision came to be rendered by the Government stating that  

elevators  and  escalators  erected  and  installed  by  the  company  

became a part of immovable property and hence are not goods. It  

was, however, held that the component parts of the elevators and  

escalators manufactured and cleared from their  respective factory  

would be chargeable to duty at the appropriate rates.  

39.By relying on the above decision, the learned Senior Counsel also  

brought  to  our  notice  an  order  under  Section  37B of  the  Central  

Board  of  Excise  and  Customs  dated  15.01.2002,  wherein  the  

assessibility of plant and machinery assembled at site was explained  

and  as  regards  the  LIFTS  and  Escalators  in  sub-paragraph (iv)  of  

paragraph 5, it was described that though LIFTS and Escalators are  

specifically  mentioned  in  sub-heading  8428.10,  those  which  are  

installed in buildings and permanently fitted into the civil structure  

cannot  be  considered  to  be  excisable  goods.  The  learned  Senior  

Counsel  therefore,  by  referring  to  the  above  orders  of  the  

Government of India and the Board of Central Excise, contended that

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the same reasoning would hold good while considering the case of  

the Petitioner.   

40.As  regards  the  question  whether  manufacture,  supply  and  

installation of LIFTS would fall within the expression ‘Sale’ or ‘Works  

Contract’, the learned Senior Counsel heavily relied upon the recent  

three Judge Bench decision of this Court in  Larsen & Toubro Ltd.  

(supra). The  judgment  was  rendered  by  one  of  us,  Hon’ble  Mr.  

Justice  R.M.  Lodha,  wherein  in  paragraph  101,  this  Court  while  

answering  a  reference  made  by  a  two  Judge  Bench,  held  that  a  

contract may involve both work and labour and also an element of  

sale  and  in  such  composite  contract,  the  distinction  between  a  

contract for sale of goods and contract for work (or services) virtually  

gets diminished. It was further held that the ‘Dominant Nature Test’  

has  no  application  and  the  earlier  decisions  which  held  that  the  

substance of the contract must be seen, have lost their significance  

where  transactions  are  of  the  nature  contemplated  in  Article  

366(29A). It went on to hold that 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

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otherwise has elements of ‘Works Contract’. Ultimately, it was held  

that  the enforceability  test  is  also not  determinative.  The learned  

Senior Counsel drew our attention to paragraphs 17, 19, 21, 47, 60  

to 65 and 76, as well as paragraph 101 where the legal position was  

summarised while answering the question referred to it.  

41.The  learned  Senior  Counsel  by  drawing  our  attention  to  the  

definition contained in the Finance Act  of  1994,  in particular  sub-

sections (29), 39(a) of Section 65 and sub-clause (zzd) to sub-section  

(105) of Section 65, contended that such definitions in the Finance  

Act under Chapter V for imposition of Service Tax, would show that  

the installation of a LIFT is nothing but a ‘Contract for Works’ and not  

‘Sale’. The learned Senior Counsel drew our attention to sub-clause  

(zzzza) to sub-section (105) of Section 65 wherein, in the explanation  

to the said sub-clause, the erection of a LIFT has been defined to  

mean  a  ‘Works  Contract’.  The  learned  Senior  Counsel  would,  

therefore,  contend  that  there  cannot  be  two  different  meanings  

relating to ‘Works Contract’, one for the purpose of Service Tax and  

the other for the purpose of Sales Tax. The submission of the learned  

Senior Counsel was adopted by all other counsel who appeared for  

the Petitioners in the other cases.

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42.Mr.  Dwivedi,  learned Senior Counsel  appearing for the State of  

Orissa, in his submissions contended that the contract as between  

the Petitioner and its Purchaser, going by its terms, is always one for  

sale of its branded LIFTS, which having regard to the nature of the  

product  has  to  be  necessarily  erected  at  the  site,  that  90%  of  

payment is to be made on the signing of the contract, that the LIFTS  

would be handed over to the Purchaser on its erection and that the  

contract provides for the payment of balance 10% on fulfillment of  

certain  other  conditions.  The  learned  Senior  Counsel  would,  

therefore, contend that in the present case, there can be no doubt at  

all as to the nature of contract as between the parties, which is one  

for  sale  and,  therefore,  there  is  no  necessity  to  further  examine  

whether  it  is  a  ‘Sale’  or  ‘contract  for  works’.  The  learned  Senior  

Counsel by drawing our attention to the judgment in  Larsen and  

Toubro Ltd. (supra) contended that the converse position argued  

by  the  learned  Senior  Counsel  Mr.  Rohinton  Nariman  in  the  said  

judgment  as  recorded therein,  would  explicitly  show as  to  how a  

clear distinction can be drawn as between a ‘Works Contract’ and a  

‘contracts for Sale’. The learned Senior Counsel further pointed out  

that in the case on hand, the contract being one for sale of the LIFTS,  

the  same  cannot  fall  within  the  expression  ‘Works  Contract’.  In

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support of his submissions the learned Senior Counsel relied upon  

the  decisions  in  M/s Patnaik  and Company  (supra), M/s  T.V.  

Sundram Iyengar & Sons  vs.  The State of Madras -  (1975) 3  

SCC  425,  Union  of  India  vs.  The  Central  India  Machinery  

Manufacturing Company Ltd. and others - (1977) 2 SCC 847 and  

also  referred  to  the  decision  in  Hindustan  Aeronautics  Ltd.  

(supra), to state as to what are the basic tests to be applied in order  

to find out whether a contract as between the parties will fall within  

the expression ‘Works Contract’ or one of ‘Sale’. The learned Senior  

Counsel,  however,  fairly  brought  to  our  notice  the  provisions  

contained in the Orissa Value Added Tax Act, 2004, in particular Rule  

6 and the Appendix, to show that by virtue of the said Act in the  

State of Orissa, as far as value added tax is concerned, erection of a  

LIFT, Elevator and Escalator would fall under the category of ‘Works  

Contract’ and that in the Appendix, a provision of 15% is made for  

deduction  towards  labour  charges,  while  arriving  at  the  taxable  

turnover.  

43.Mr. R. Venkataramani, learned Senior Counsel, appearing for the  

State of Tamil Nadu and Andhra Pradesh, drew our attention to the  

definition of ‘Sale’ and ‘Works Contract’ under the Andhra Pradesh  

General  Sales Tax Act,  1957 as defined in Section 2(n) & (t)  and

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submitted that going by the definition of ‘Sale’ every transfer of the  

property in goods in pursuance of a contract or otherwise by one  

person in the course of his trade or business, for cash, or for deferred  

payment or for any other valuable consideration, the same would be  

a sale and by referring to the definition of ‘Works Contract’ under  

Section 2(t), he pointed out that the definition itself makes it clear  

that any agreement for cash or for any other valuable consideration  

for carrying out the building construction, manufacture, fabrication  

etc., including erection/installation or commissioning of any movable  

or immovable property alone would fall within the said definition. By  

referring  to  the  above  statutory  provisions,  the  learned  Senior  

Counsel contended that there is a world of difference as between a  

contract by which one party agrees to supply a product as compared  

to  a  party  agreeing  to  carry  out  a  work  such  as  construction  of  

building,  erection,  installation  or  commissioning  of  movable  or  

immovable property. In other words, according to the learned Senior  

Counsel going by the terms of the contract between the Petitioner  

and  the  prospective  Purchasers,  what  is  agreed  to  between  the  

parties is the supply of LIFTS and the act of installation is not the  

contract  for  which  the  parties  were  ad  idem.  Therefore,  if  the  

contract distinctly discloses that it is one for supply of a LIFT and the

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same is effected by erecting it in the premises of the Purchaser, it  

cannot be held that the act of erection alone should be taken into  

account and on that basis hold that the contract was one for ‘Works’  

and not for ‘Sale’.   

44.The learned Senior Counsel by referring to paragraph 101 of the  

judgment  in  Larsen  & Toubro  Ltd.  (supra) contended  that  by  

installation, the LIFT in its full form is brought out and handed over to  

the  Purchaser.  In  other  words,  according  to  the  learned  Senior  

Counsel by installation, the LIFT is put in a fit condition for use and  

submitted that the principles laid down in the case of M/s. Patnaik  

and Company (supra), T.V. Sundaram Iyengar & Sons (supra),  

have all laid down the correct principles and, therefore, the decision  

in  Kone Elevators (India) Pvt. Ltd. (supra) was rightly decided.  

While referring to the decisions in Vanguard Rolling Shutters and  

Steel  Works (supra) and  Man  Industrial  Corporation  Ltd.  

(supra),  the  learned  counsel  submitted  that  none  of  the  said  

decisions can be said to warrant any consideration.  In support of his  

submission learned Senior Counsel relied upon the decision in  Dell  

Inc. vs. Superior Court No.A118657 and relied upon the following  

passage in the said judgment:

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“Drawing  the  line  between  taxable  sales  of  tangible  property and nontaxable sales of services or intangibles is  sometimes  difficult,  especially  where  property  that  was  largely  created  by  personal  services  is  transferred.  (Hellerstein,  State  Taxation  (3d  ed.2007)  12.08[1],  p.1).  Where  services  and  tangible  property  are  inseparably  bundled  together,  determination  of  the  taxability  of  the  translation  turns  upon  whether  the  purchaser’s  “true  object” was to obtain the finished product or the service.”

45.The learned Senior Counsel, therefore, contended that when the  

true object of the transaction in the case on hand was to obtain a  

finished product  whatever  services  involved should  be held  to  be  

incidental and also should be treated as part of a sale of the tangible  

property and thus subject to ‘sales’ or ‘use tax’.  

46.Dr.  Singhvi,  learned Additional  Advocate General  appearing  for  

the State of Rajasthan prefaced his submission by contending that  

the first  question to  be examined is  whether  the transaction is  a  

‘Sale’ or ‘Works Contract’. According to the learned Counsel, the test  

that was prevailing pre 46th Amendment, continued to hold good and  

that  the  sale  of  a  LIFT  is  definitely  not  a  ‘Works  Contract’.  The  

learned  Counsel  relied  upon  the  decision  reported  in  Bharat  

Sanchar  Nigam  Ltd.  and  Another  vs.  Union  of  India  and  

others, (2006) 3 SCC 1, in particular paragraph 43 and pointed out  

that the transactions which are ‘mutant sales’ alone are limited to

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the clauses of Article 366 (29-A) and that all other transactions would  

have to qualify sales within the meaning of Sale of Goods Act, 1930  

for  the  purpose  of  levy  of  sales  tax.  The  learned  Counsel  while  

referring  to  the  judgment  in  Larsen & Toubro Ltd.  (supra) by  

making specific reference to paragraph 90, contended that although  

the  decision  in  Hindustan  Shipyard  Ltd.  (supra) has  been  

distinguished,  paragraph 6 of  the said  decision is  still  the correct  

proposition of law to be applied in all cases to find out the nature of a  

contract.

47 Mr.  Preetesh Kumar,  learned Standing Counsel  for the State of  

Gujarat  by  referring  to  paragraphs  71  to  76  of  the  judgment  in  

Larsen & Toubro Ltd. (supra) and in particular the ratio laid down  

in paragraph 76, contended that even by applying the test stated  

therein, the contract of the Petitioner for supply of the LIFT could not  

be  brought  within  the  concept  of  ‘Works  Contract’.  The  learned  

Counsel contended that in the light of the agreement by which the  

Petitioner came forward to supply the LIFT and erect the same in the  

premises of the Petitioner, it could only be held to be a ‘contract for  

sale’ and not ‘Works Contract’, thereby attracting Article 366 (29-A)  

(b) of the Constitution.

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48.Mr. Darius Khambata, learned Advocate General for Maharashtra  

and Mr.  K.N.  Bhatt,  learned Senior  Counsel  for Karnataka actually  

conceded to the effect that the question posed for consideration has  

been  fully  answered  in  the  decision  in  Larsen  &  Toubro  Ltd.  

(supra).

49.Mr.  Malhotra,  learned  Additional  Solicitor  General  for  Union  of  

India contended that the Union of India has nothing to do with the  

issue as to whether it is a ‘Sale’ or ‘Works Contract’, inasmuch as  

erection  of  LIFT  has  been  brought  under  the  definition  of  ‘Works  

Contract’ for the purpose of levying service tax.  

50.Mr. Salve, learned Senior Counsel in his submissions referred to  

the decisions in M/s Vanguard Rolling Shutters and Steel Works  

(supra), Commissioner  of  Sales  Tax,  M.P. vs.  Purshottam  

Premji  reported  in  (1970)  2  SCC  287  and  Commissioner  of  

Central Excise, Ahmadabad vs. Solid and Correct Engineering  

Works  and  others  reported  in  (2010)  5  SCC  122.  The  learned  

Senior  Counsel  attempted  to  distinguish  the  decision  in  M/s  

Vanguard Rolling Shutters and Steel Works (supra).  In so far  

as  the  decision  in  Solid  and Correct  Engineering Works  and  

others (supra),  the  learned  Counsel  after  making  reference  to  

paragraph 16, 23 and 25, submitted that erection or installation of a

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LIFT  could  not,  therefore,  be  held  to  be  a  structure  which  was  

embedded to the earth on a permanent basis in order to call it an  

immovable property.

51.Having  heard  the  learned  Counsel  for  the  Petitioners  and  the  

Respondents  and  having  considered  the  material  papers  placed  

before us and the various decisions relied upon by the Petitioners as  

well  as  the  Respondents,  at  the  foremost,  what  has  to  be  first  

ascertained is whether the contract between the Petitioner and its  

Purchaser would fall within the definition of ‘Works Contract’ in order  

to  attract  clause  (b)  to  Sub-Article  (29-A)  of  Article  366  of  the  

Constitution. In fact, if an answer to the said question can be held in  

the affirmative, then that would axiomatically lead to an answer in  

favour of the Petitioner. Though, several decisions, wherein various  

tests have been highlighted, were cited before us and also reference  

to various provisions of different statutes, as well as the Finance Act  

provisions were brought to our notice, in my view, before adverting  

to those tests and the provisions, in the first instance, it will have to  

be  found  out  as  to  what  exactly  was  the  nature  of  contract,  as  

between the Petitioner and its Purchasers.  

52.At the outset, even before examining the terms of the contract, it  

will  have to  be  stated  that  the  only  business  of  the  Petitioner  is

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manufacture  and  supply  of  LIFTS/ELEVATORS.  In  fact,  neither  Mr.  

Salve nor any other Counsel appearing for the Petitioners submitted  

before  us  that  the  business  of  the  Petitioner  included  any  other  

activity along with the manufacture and supply of LIFTS/ELEVATORS.  

Certainly,  it  is  not  the  case  of  the  Petitioner  that  mere  

installation/erection  of  LIFT/ELEVATOR  simpliciter  is  their  business  

activity.  It  cannot  also  be  contended  that  the  job  of  

installation/erection  of  a  LIFT/ELEVATOR  can  be  done  only  by  

LIFT/ELEVATOR manufacturers. In other words, manufacture of LIFT  

and erection of  a  LIFT can be independently  handled by different  

persons. Therefore, the best course to proceed is on the admitted  

position that the business of the Petitioner is manufacture and supply  

of LIFTS/ELEVATORS as well as its installation. Once, the said factual  

position relating to the business of the Petitioners is steered clear of,  

the next question relates to the basis of the Contract that emerged  

between the Petitioners and the Purchasers in regard to the supply of  

the  LIFTS/ELEVATORS  and  thereby  ascertaining  what  were  the  

agreed terms as between the parties. It must be stated that in order  

to  find  out  the answer to  the question referred,  namely,  whether  

manufacture,  supply  and  erection/installation  of  LIFTS  would  fall  

within  the  concept  of  ‘Sale’  or  ‘Works  Contract’,  analyzing  the

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various  tests  in  the  forefront  and  thereafter  apply  them  to  the  

contract  concerned,  may  not  be  an  appropriate  approach  in  the  

peculiar facts of this case.  

53.Therefore, in my view, the proper course would be to first analyze  

what  exactly  is  the  contract  between  the  Petitioner  and  the  

Purchaser and under the terms of the ‘Contract’ what is the element  

of  works/service  involved  in  order  to  hold  that  it  is  a  ‘Works  

Contract’. Therefore, at the risk of repetition, it will have to be stated  

that the initial exercise to be carried out is as to what are the terms  

of the contract.  

54.I  have set out in detail  the said terms based on the specimen  

contract filed before us in the form of Annexure A-1 along with its  

enclosures. These terms have been set out in detail in paragraphs 8  

to 19 and 32. I have also found that the Purchaser placed an order  

with  the Petitioner  for  supply of  LIFTS/ELEVATORS mentioning the  

specifications. In fact, the document dated 23.12.2009, along with  

which all the other connected annexures have been enclosed states  

that it is by way of acknowledgement of the order of the proposed  

features of the LIFT to be supplied. It is true that in the enclosures  

annexed along with the said document, in few places, the expression  

‘Works Contract’ has been used. It is needless to state that simply

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because someone calls an activity as a ‘Works Contract’ that by itself  

will  not  ipso facto make the activity a ‘Works Contract’ unless the  

activity as explained in the document affirms and confirms to the  

effect that the said activity is nothing but a ‘Works Contract’. In my  

opinion,  when  a  detailed  reference  to  the  terms  agreed  upon  

between  the  Petitioner  and  the  Purchaser  is  made,  it  will  not  be  

proper to merely go by such expression used sporadically to hold  

that the contract is a ‘Works Contract’. On the other hand, I find that  

what the Petitioner has agreed under the Contract, is only to supply  

its branded LIFT in the premises of the Purchaser. I can firmly and  

validly state that a careful  analysis  of  the terms contained in the  

contract  will  lead  only  to  that  conclusion  and  not  any  other  

conclusion.  

55.As stated earlier and as has been set out in detail in paragraphs 8  

to 19, 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, I find that  

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

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its  LIFT/ELEVATOR  in  the  said  premises.  In  a  very  insignificant  

manner, the Petitioner undertakes to attend to certain aspects while  

erecting  the  LIFTS  in  the  premises  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 Petitioner cannot be heard to say that it brings different parts of  

the LIFT and that its activity of assembling the same 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  

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.  

56.When examining the claim of the Petitioner that what was agreed  

by the Petitioner in the contract with its Purchaser is nothing but a  

‘Works  Contract’,  such  a  claim  should  be  explicit  and  must  be  

discernable  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 mentioning of the expression ‘Works Contract’ or by making  

reference to the basis for fixing the cost of labour involved in the

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manufacture  or  by  simply  using  the  expression  ‘Works  Contract’  

without any scope of performing any work at the command of the  

Purchaser, in my opinion, the Petitioner’s claim to hold its activity as  

a  ‘Works  Contract’  cannot  be  accepted  on mere  asking.  In  other  

words, 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. Here, 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 is paramount  

as found in the terms of the contract. The 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.  

57.While making a deeper scrutiny of the terms of the contract as a  

whole,  as  noted  earlier,  in  Annexure  A-1,  which  is  the  

acknowledgement of the Order dated 23.12.2009, the very subject  

column States:

“Order  Acknowledgment  for  One  (1)  No.  OTIS  Electric  Traction  Passenger  Elevator  for  your  Building  at  “BAPU  NAGAR, JAIPUR, RAJASTHAN”.”

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58.The contents of the letter also states that the Petitioner was glad  

to  receive  the  valued  order  placed  with  it  by  the  Purchaser  and  

stated  that  it  is  prepared  to  supply  and  install  One (1)  No.  OTIS  

Electric Traction Passenger Elevator. Thus, while acknowledging the  

order placed by the Purchaser, the proposed specifications submitted  

earlier based on the Purchaser’s requirement have been enclosed. A  

specific  Contract  number is  also provided.  Rest  of  the documents  

consist of the details of the model, the nature of the machine that  

would be operating the LIFTS, the brake system, the type of parts  

that  are  used  in  the  Machine  and  the  peculiar  features  of  those  

mechanical aspects. Thereafter, the benefits of the LIFTS are set out,  

namely, the smooth and controlled acceleration/deceleration, better  

riding quality, assured leveling accuracy of +/- 5 MM, improved flight  

time,  improved reliability  and increased efficiency,  reduced power  

consumption,  reduced  heat  release,  flexibility  of  programme  and  

programming of features at site, enhancing the value of the building  

where  the  LIFT  is  erected  and  simplified  maintenance.  The  other  

terms  relate  to  maintenance,  wherein  the  Petitioner’s  offer  of  

providing 12 months free maintenance,  the time from which such  

maintenance would commence and the conditions upon which such

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maintenance  offered would  operate  and also  making it  clear  that  

during the period of maintenance the Purchaser will  be the owner  

and also the circumstances in which the Petitioner would be liable for  

any damage that occurs to the LIFT. A consideration of this part of  

the contract also does not refer to or contain any element of work or  

service to be provided as agreed between the parties.  

59.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 wherein, what all the Petitioner  

has come forward to provide is a ladder for having access to the pit.  

The  other  one  which  the  Petitioners  agreed  to  provide  is  a  steel  

fascia for each sill.  The third one is the cutting of  walls,  floors or  

partitions together with any repairs to be made necessary including,  

grouting of all bolts, sills, members indicator and button boxes, etc.  

and a steel scaffolding to be made in the course of erection, which  

the Petitioner undertakes to provide.

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60.As far as the provision of a ladder in the pit is concerned, it can  

again be taken only as a material part of the LIFT and it does not  

involve  any  work  to  be  performed.  Similarly,  provision  of  a  steel  

fascia at every sill level is again another part of the LIFT and here  

again there is no element of work or service to be rendered. The  

provision relating to cutting of walls, floors or partitions together with  

any repairs to be made necessary including grouting of all bolts, sills,  

members indicator and button boxes etc., are but certain incidental  

minor jobs to be attended to in the course of the supply and erection  

of  the  LIFT.  When  under  the  contract,  the  Purchaser  has  been  

directed to prepare the hoist way, which is a solid structure in the  

building and in the course of the erection of the LIFT if some holes  

are to be drilled for fixing a frame or a nut and bolt as compared to  

the enormity of the preparatory work that has been entrusted with  

the Purchaser for the purpose of erecting the LIFT, it must be stated  

that the said work of cutting the walls to fix the frames and grouting  

the bolts 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. Providing a steel scaffolding again  

is not a matter which can be held to be a contract for works. On the  

other hand, for the purpose of grouting bolts and fixing the frames in

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a hoist way, which is stated to be having 30/40 metres height/depth,  

it has to be mandatorily arranged by someone but here again it will  

have  to  be  stated  that  the  same  cannot  be  a  decisive  one  for  

ascertaining  the  nature  of  contract,  as  between  the  parties.  

Therefore,  on  the  whole,  the  terms  under  the  head  ‘Preparatory  

Work’ does not in anyway persuade us to hold that what was agreed  

between the parties in this contract was a ‘Works Contract’.   

61.The next set of conditions contained in the Contract is under the  

head ‘IEEMA Price Variation Clause for Elevator Works Contracts’. As  

stated earlier, this is the document in which the expression ‘Works  

Contract’  has  been  used.  When  examining  the  details  contained  

under  the  said  head  what  all  it  says  is  that  the  price  

quoted/confirmed is based on the cost of raw materials/components  

and labour cost as on the date of quotation and the same is deemed  

to be related to Wholesale Price Index Number for Metal Products  

and All  India Average Consumer Price Index Number for Industrial  

Workers. The said part of the contract is nothing but an indication  

that the price agreed between the parties or the supply of the LIFT  

may vary under certain contingencies and such variation will depend  

upon the price indices relating to Metal Products and the Consumer  

Price  Index.  I  see  no  co-relation  at  all  for  the  said  stipulation

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contained  vis-à-vis  the  caption  ‘Elevator  Works  Contract’.  Merely  

because  the  price  is  likely  to  vary  based  on the  variation  in  the  

indices of the price of Metals and Consumer Price, I fail to understand  

as to how that has any relevance or a reference to those indices  

would determine the nature of the contract as a ‘Works Contract’.  

Therefore, the caption ‘Elevators Works Contract’, while referring to  

the Price Variation Clause is a total misnomer and based on the said  

caption simpliciter, the whole contract cannot be called as a ‘Works  

Contract’.  Under  the  very  same  head  it  is  stipulated  by  way  of  

payment terms that claim for manufactured materials should be paid  

along with the material invoice and claim for installation should be  

paid along with their final invoice, which according to the Petitioner  

would relate to the labour costs. It  however,  states that the price  

quoted in the proposal would be formed upto a particular date and  

thereafter,  if  there  is  any  delay  in  completion  of  installation  and  

commissioning  due  to  reasons  attributable  to  the  Purchaser,  the  

price would be varied in accordance with the above costs indices.  

The  price  variation  is  supposedly  agreed  between  the  parties  to  

prevail upto a specified date. Therefore, in the event of the contract  

being completed within the specified date, there is no question of  

any price variation arising in order to work out such variation based

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on  the  ‘Wholesale  Price  Index’  or  ‘Consumer  Price  Index’.  Even  

assuming a contingency arises due to the fault of the Purchaser, at  

best  it  may  result  in  some  variation  in  the  price  and  I  fail  to  

understand as to how based on the working out of such variation in  

the price, it can be held that the whole contract is a ‘Works Contract’.  

62.I do not find any sound logic or 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 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 and to call it an indivisible  

one, is contrary to its own terms.   

63.With  this,  the  ‘Conditions  of  the  Contract’  can  be  referred  to,  

which  contains  as  many as  27  conditions.  These  conditions  have  

been  elaborately  discussed  in  paragraph  18  of  this  judgment,  to  

which  I  once  again  bestow  my  serious  consideration,  in  order  to  

appreciate whether, these conditions at least throw any light to state

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that  the  contract  can  be  brought  within  the  expression  ‘Works  

Contract’.   

64.When examining these conditions, 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 LIFT 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. Whereas by  

reason of any delay beyond the control of the Petitioner, within 90  

days  from  the  date  of  the  commencement  of  the  contract,  the  

Petitioner  will  have  the  right  to  demand  for  the  entire  payment  

without doing anything towards the erection part of it. Alternatively,  

while  the  Purchaser  would  be  liable  to  pay  the  entirety  of  the  

contracted amount  for  the supply of  the LIFT,  the Petitioner  after  

receiving  the  full  payment  would  still  have  sufficient  time  to  

effectuate  the  supply  in  the  event  of  the  supply  not  being  

effectuated within the due date, then, on that ground the inability to

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commission  the  LIFT  within  30  days  or  within  90  days  after  the  

materials  are  ready  for  dispatch  will  not  for  any  reason  be  

attributable to the Petitioner. In fact, Condition No.8 at the end states  

that  if  for  any  reason  the  Petitioner  is  not  able  to  supply  any  

equipment  within  52  weeks,  then  at  its  option,  it  can  cancel  the  

contract without there being any liability for payment of damages or  

compensation.  Therefore,  those  terms  relating  to  payment  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. In other words, supply  

of materials of the LIFT and installation costs are separately worked  

out  in  order  to  ensure  that  irrespective  of  the  installation,  the

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Petitioner will be able to realize the value of the material cost. This  

conclusion which is based on the above terms, 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% payment in the first instance  

and the balance 10% under certain other situations, fully supports  

the above conclusion.

65.A reference to the various other conditions in the contract also do  

not suggest that the consideration under the Contract to be borne by  

the Purchaser, has got anything to do with the installation part of the  

LIFT. On the other hand, the terms have downright been agreed upon  

between the parties only to mandate the Purchaser to pay 90% of  

the contracted amount on mere signing of the contract and to pay  

the  balance  10%  within  30  days  of  the  Petitioner’s  offer  to  

commission the LIFT and even if the said event of commissioning of  

the  LIFT  fails  to  occur  due  to  any  reason  not  attributable  to  the  

Petitioner or beyond its control, within 90 days of the materials made  

ready for dispatch at the premises of the Petitioner. In that situation  

also  what  all  the  Petitioner  will  have  to  ensure  is  that  such  

components  of  the  LIFTS  are  ready  for  dispatch.  At  the  risk  of

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repetition, it can be stated that if on the date of the signing of the  

contract 90% payment is made and within the contract period i.e 52  

weeks,  the  Petitioner  is  able  to  show  that  the  whole  of  the  

components of the LIFTS are ready for dispatch at its premises, the  

Purchaser is bound to pay the balance 10% also within 90 days from  

the date of  such availability of  materials  for  dispatch without any  

other  stipulation  as  to  such  equipments  or  components  being  

delivered  at  the  spot  of  the  Purchaser  for  its  installation.  If  the  

conditions of the contract relating to payment are discernable 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.  

66.As far as the other clauses are concerned, they have nothing to  

do  with  the  execution  of  the  works  or  creating  any  duty  or  

responsibility  on  the  Petitioner  to  carry  out  such  execution  and  

thereby, any corresponding liability being fastened on the Petitioner  

in the event of its failure to carry out the erection/installation part of  

it will not become attributable. It will also be relevant to note that if  

for  any  reason,  the  contract  is  not  fulfilled  due  to  reasons

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attributable to the Purchaser, the apportionment clause will enable  

the  Petitioner  to  retain  such  part  of  the  amount  of  90% already  

received to cover its costs and expenses. In fact the whole discretion  

vests  with  the  Petitioner  to  determine  such  apportionment  under  

Clause 21. Therefore, on a detailed consideration of the conditions of  

the contract, one will not be able to state with any certainty that the  

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.

67.The signed part of the said 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.   

68.Having considered the above terms of the contract threadbare, I  

am convinced that it can only be concluded that this contract 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

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event, as I have found that 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  can  never  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  

Article 366(29A)(b) cannot be made and does not in any way support  

the contentions raised by the Petitioner.   

69.De hors the abovesaid conclusion, based on the very contract, I  

wish to deal with the various submissions of the Petitioner based on  

various  decisions relied  upon,  including  the decision in  Larsen &  

Toubro Ltd. (supra).

70.Keeping the above salient features of the contract between the  

Petitioner and the Purchaser in mind, I now deal with the submissions  

made by the learned Senior Counsel for the Petitioners. Mr. Salve,  

learned Senior Counsel in his opening submission relied upon Section  

2(jj) of the Orissa Sales Tax Act, 1947 and contended that applying  

the said definition of ‘Works Contract’ to the present contract, the  

same would squarely fall within the said definition. When examining

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the said contention, it will be relevant to make a detailed reference  

to the said provision under the Orissa Sales Tax Act. For appreciating  

this provision, a reading of it is required and has been extracted in  

paragraph 24 of  this judgment.  The definition of  ‘Works Contract’  

under Section 2(jj) of the Orissa Sales Tax Act 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 or commissioning of any movable or immovable  

property.  

71.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.  In my view, whether as a movable property or  

immovable  property,  it  may  not  make  any  difference  while  

considering the other prescriptions contained in the said provision.  

What is really relevant for consideration is to examine the issue by  

referring to the said provision, which in the foremost, depends upon  

an  agreement  between  the  parties.  The  said  agreement  should  

ordain an obligation on one party who has been entrusted with the

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task  of  fabrication,  erection,  installation  of  any  movable  or  

immovable property. 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  

Section 2(jj).  

72.Next,  as  per  the agreement,  it  should be for  cash or  deferred  

payment or other valuable consideration. In other words, it must first  

satisfy the definition of a ‘concluded contract’ as provided under that  

Section.  In this context, it would be relevant to refer to Section 2(h)  

and the first  part  of  Section 10 of  the Indian Contract  Act,  1872.  

Section 2(h) reads as under:

“An agreement enforceable by law is a contract.”

The first part of Section 10 reads as under:

“What  Agreements  are  contracts  –  All  Agreements  are  Contracts if they are made by the free consent of parties,  competent to contract, for a lawful consideration and with  the lawful object and are not hereby expressly declared to  be void.”

73.Therefore, in order for a contract to be valid, it must be one which  

can be enforced by law and such agreements if made between the

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parties must be for a lawful consideration and with a lawful object. It  

is needless to state that for any contract to be valid and lawful, the  

basic ingredients of offer and acceptance for valuable consideration  

must  be  present.  Keeping  the  said  provisions  relating  to  a  valid  

contract  under  the provisions  of  the Indian Contract  Act  in  mind,  

when an examination is made on the implication of the definition of  

‘Works Contract’ under Section 2(jj) of the Orissa Sales Tax Act to the  

case  on  hand,  at  the  foremost,  it  is  necessary  to  examine  as  to  

whether there is a valid agreement and that valid agreement and if  

such an agreement is for a lawful consideration to perform the work  

of  fabrication,  erection,  installation of  any movable  or  immovable  

property. Further, such an agreement should also be one for cash or  

deferred payment or other valuable consideration.

74.Keeping the above statutory prescriptions in mind, the same can  

be applied  to  the  case on hand.  As  has  been pointed out  in  the  

earlier part of the judgment, where the various terms of the contract  

as between the Petitioner and the Purchaser have been examined, in  

particular the consideration part of it, it is found that the majority of  

the consideration was payable to  the Petitioner within  one month  

from the date of commissioning or within  90 days of  keeping the  

materials ready for supply in its premises. This is on the ground that

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the commissioning could not be effected as agreed or within 30 days  

of  its  readiness to  commission and by stating  that  its  inability  to  

commission  was  delayed  due  to  reasons  beyond  its  control.  This  

provision  in  the  Contract  is  de  hors the  stipulation  in  Condition  

No.25(a)  under  which  a  minimum  of  16  weeks  is  prescribed  for  

commissioning while the maximum period is 52 weeks, which again  

depends upon the fulfillment of the agreed conditions fastened on  

the Purchaser. It also provides for extending the contract periods. To  

recapitulate the said regime of the contract, it can be stated that the  

parties agreed as per the agreement wherein the Purchaser is bound  

to pay 90% of the agreed sum at the time of signing of the contract  

itself and the balance 10% within 90 days from the day the Petitioner  

gets the materials ready for dispatch in its premises, if it could not  

commission  as  agreed  or  within  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.  In  other  words,  the  moment  the  

materials for a LIFT/ELEVATOR are made ready and kept for dispatch

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in  the  premises  of  the  Petitioner,  under  a  particular  contingency  

within 90 days thereof, the majority of the contracted amount is to  

be  paid  to  the  Petitioner  without  any  corresponding  legally  

enforceable obligation on the Petitioner to carry out the erection or  

installation in the premises of the Purchaser.   

75.In fact,  the period actually agreed between the parties,  as per  

which the Petitioner is to carry out the installation part of the LIFT  

runs to 52 weeks i.e.,  for one full  year, whereas the whole of the  

consideration would become payable within 90 days from the date  

the  materials  are  kept  ready  for  dispatch  in  the  premises  of  the  

Petitioner.  Therefore, I fail to understand as to how it can be held  

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 of the Petitioner, the supply of  

the material or erection or installation fails to take place, the remedy  

of the Purchaser may at best be for recovery of the material part of  

the  contract  and  I  do  not  find  any  provision  in  the  terms  of  the  

contract,  which would entitle  the Purchaser  to lawfully  enforce as

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against  the  Petitioner  for  the  execution  part  of  it,  namely,  the  

erection/installation of the LIFT in its premises. In my opinion such a  

consequence would be inevitable having regard to the terms of the  

contract, which in spite of my best efforts, was not able to discern  

any specific  clause which  would entitle  the Purchaser  to  seek for  

such enforcement for erection/installation. On one hand, a provision  

from the contract states that the Purchaser may be entitled to retain  

the materials even in uninstalled position in the event of the contract  

not being fulfilled in its fullest terms.   

76.On the other hand, in the event of any failure on the part of the  

Purchaser in effectuating the payment or in fulfilling certain other  

aspects, such as construction of hoist way and other works related,  

obligations to be performed on its part, the Petitioner has retained  

every right to charge interest for such delay, if any, caused at the  

instance of the Purchaser and in the event of the Contract failing to  

fructify, the Purchaser would be liable to pay compensation/damages  

to the Petitioner and not vice versa. Since the above conclusion is  

the  outcome  based  on  the  relevant  terms  of  the  Contract,  the  

mentioning  in  Clauses  10  and  14  that  the  contract  is  otherwise  

indivisible ‘Works Contract’ will not by itself make it indivisible or a  

‘Works Contract’. When that is the factual and legal outcome as per

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the terms of the contract,  it  will  have to be held that there is no  

scope to apply Section 2(jj) of the Orissa Sales Tax Act to the case on  

hand and hold that the manufacture, supply and installation of the  

LIFT by the Petitioner would fall within the said definition of ‘Works  

Contract’. It may be a different situation if the contract was one for  

mere fabrication/erection/installation.  Certainly  a  simple activity  of  

fabrication cannot be equated to manufacture of parts of a LIFT since  

such fabrication may take place at the site with the aid of material  

and labour.

77.That  apart,  provisions of  the Indian Contract  Act stipulates 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 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 payment  

of the balance 10% under such contingencies, what all the Petitioner

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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  

reported  by  the  Petitioner.  In  effect  such  a  contract  as  agreed  

between the Petitioner and its Purchaser as per the provisions of the  

Indian Contract Act if were to be considered for the invocation of the  

definition of ‘Works Contract’ under Section 2(jj), it can be found that  

the said contract does not in any way create any legal obligation on  

the Petitioner to effect the erection or installation of the LIFT as a  

movable or immovable property, satisfaction of which contract alone  

will  attract the definition of ‘Works Contract’ under Section 2(jj) of  

the Orissa Sales Tax Act.

78.Mr. Salve, learned Senior Counsel then contended that the terms  

contained in the contract for manufacture, supply and installation of  

the LIFT as well as the various prescriptions contained in the Field  

Installation  Manual  show  that  what  was  agreed  as  between  the  

parties  would  fall  within  the  definition  of  ‘Works  Contract’  and  

therefore, be held as the same.  In the previous paragraphs, it has  

been stated as to how the contract between the Petitioner and its  

Purchaser is mainly for the supply of the LIFT and the agreement is  

not in any way conditional to the installation part of it. Therefore, the

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reference to the Field Installation Manual will be of no assistance to  

the Petitioner, since it only describes as to how various steps are to  

be followed by the personnel of the Petitioner while erecting the LIFT.  

Since, the agreement, namely, the proposal for the supply and the  

consideration was agreed as between the Parties, without creating  

any legally enforceable rights as regards the installation part of it,  

the reference to the Field Installation Manual, which is an internal  

document  of  the  Petitioner  issued  to  its  employees  for  their  

guidance,  does not in anyway advance the case of the Petitioner.  

Therefore,  for  the  very  same reasons,  the  said  contention  of  the  

learned Senior Counsel is also liable to be rejected.   

79.I have also highlighted how 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 paid along with our final  

invoice.’ In fact the copy of the two invoices dated 17.12.2009 and  

20.09.2010,  clearly  explains  the  fact  that  the  first  one related to  

material cost and the subsequent one only related to labour cost.

80.I  have examined the provisions  of  the Bombay Lifts  Act,  1939  

which have been raised by learned Senior counsel for the petitioners  

in paragraph 25 and have extensively dealt with them in paragraph

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37 of  this  judgment.    Based on such examination of  the various  

provisions of the Act, I have found that these provisions are meant  

for getting a permit, licence, registration etc. and for the purpose of  

ensuring that in the course of the installation, as well as, while the  

LIFT is in operation or in the course of the maintenance of the LIFT,  

no damage is caused to men and materials. Beyond that, based on  

the said provisions there is 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’.   Therefore,  the  said  

submission of the learned Senior Counsel cannot also be accepted.

81.The  learned  Senior  Counsel  then  referred  to  a  decision  of  the  

Government of India reported in In Re: OTIS Elevator Co. (India)  

Ltd.  (supra), which  has  been  dealt  in  paragraph  38  of  this  

judgment.  I fail to see any scope to rely on the said decision, as it is  

only that of the Department of Government of India.  Even otherwise,  

the said decision was for the purpose of finding out as to whether  

‘excise duty’ was payable at the time when the manufactured parts  

of  elevators/escalators  were  cleared  from  the  premises  of  the  

Petitioner.  I do not find any scope at all to apply the said conclusion  

of the Government of India to the case on hand, apart from the fact  

that the said conclusion reached under the provisions of the Central

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Excise Laws cannot be applied to the legal issue with which we are  

concerned.   In  any event,  such a decision of  the authority  of  the  

Government of India cannot even have a persuasive value on this  

Court.

82.A  reference  was  also  made to  a  notice  issued  by  the  Central  

Board of Excise and Customs dated 15.01.2002, under Section 37B of  

the Central Excise Act which has been dealt with in paragraph 39 of  

this  judgment. Here again I  fail  to see any acceptable grounds to  

apply any of the reasoning for such conclusion. When I examined the  

nature of the contract of the Petitioner for manufacture, supply and  

installation of the LIFTS to its Purchaser, I do not find any scope at all  

to apply those decisions or the conclusions taken by the concerned  

authority under the provisions of Central Excise Act.

83.The  learned  Senior  counsel  for  the  petitioner  lastly  made  

reference  to  sub-Sections  29,  39(a)  and  sub-clause  (zzd)  to  sub-

Section  105  of  Section  65 along with  a  further  reference  to  sub-

Clause (zzza) to sub-Section 105 to Section 65, which has been dealt  

with in paragraph 41 of this judgment. Though in the first blush, the  

submission appears to be forceful, on a meticulous examination of  

the provisions with particular reference to the contract as between

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the Petitioner and its Purchaser, I am compelled to reject the said  

submission as it has no force.   

84.To note the fallacy in the submission, a clear understanding of the  

said provision is required.  At the very outset, it will have to be stated  

that the present attempt is to find out an answer to the question  

whether manufacture, supply and erection of a LIFT, will fall under  

the category of ‘Sale’ or ‘Works Contract’ for the purpose of a levy  

under the Sales Tax Act.  Section 65(29), 65(39a) and 65(105) (zzd)  

and (zzzza) 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. For this proposition of law, reference  

can be made to one of  the earliest  decisions of  England in  Cape  

Brand Syndicate vs. Inland Revenue Commissioner,  1921-1 KB  

64.  The  above  decision  was  followed  in  Income  Tax  Officer,  

Tuticorin  vs. T.S.  Devinatha  Nadar,  Etc.,  AIR  1968  SC  623  

wherein it held that what is applicable to another taxing statute may  

not be applied to a case governed by sales tax statutes. Keeping the  

above  fundamental  principle  in  mind,  an  examination  of  Section  

65(29), defines ‘commissioning and installation agency’ to mean any  

agency providing service in relation to erection,  commissioning or  

installation.  Section 65(39a) further defines the expression ‘erection,

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commissioning or installation’ to mean any service provided by any  

such  agency,  in  relation  to,  inter  alia installation  of  LIFT  and  

escalation.  Section 65(105) (zzd) defines ‘Taxable Service’ inter alia  

to  mean  service  provided  or  to  be  provided  to  any  person  by  

erection,  commissioning  or  installation  agency  in  relation  to  

commissioning  and  installation.   Therefore,  reading  the  above  

provisions together, what emerges is that any service provided by  

way of commissioning and installation of LIFT and Escalators by any  

agency  would  be  a  Taxable  Service.   Once  the  said  position  is  

steered clear of, the other provision referred to was Section 65(105)

(zzzza), which again is one other taxable service, namely, a service  

to any person by any other person in relation to the execution of  

‘Works Contract’.  It excludes ‘Works Contract’ in respect of roads,  

airports,  railways,  transport  terminals,  bridges,  tunnels  and  dams  

obviously because those are services of the State.   The said sub-

clause,  however,  contains  a  definition  of  ‘Works  Contract’  in  the  

explanation part.   It,  however,  refers to a contract which includes  

transfer of property in goods involved in the execution of a works  

contract. In Clause (i) of the Explanation, it makes it clear that such  

transfer of goods would attract levy of tax as sale of goods, under  

the relevant statutes, namely, Sales Tax Acts; State or Central.  In

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Clause  (ii)  of  the  Explanation,  it  specifically  includes  erection,  

commissioning  or  installation  of  LIFT  and  Escalator.   It  will  be  

profitable also to refer to Section 65(50), which defines ‘goods’ to  

mean what is assigned to it in clause (7) of Section 2 of the Sale of  

Goods Act,  1930.  Section 2(7) of  Sale of  Goods Act  defines it  to  

mean every kind of movable property other than actionable claim,  

etc.  Similar such definitions are attributed to ‘goods’ under the Sales  

Tax Acts.   Since Section 65 and the various subsections,  namely,  

(29),  (39a),  (105),  (zzd),  (zzzza)  put  together  only  relatable  to  

Service Tax, the question of importing the said definition of ‘Works  

Contract’  in  the  explanation  to  Section  (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-section 105 to Section  

65, distinctly refers to transfer of goods in any such contract to mean  

such goods leviable to tax as a sale of goods. It will have to be stated  

that such leviability by itself may independently attract tax liability  

under the relevant Sales Tax Statutes.  However, it is not the concern  

in this case and it is to be left open for consideration as and when  

any need arrives to decide that question. Therefore, the reference to  

the above provisions under the Service Tax Act are of no assistance

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to the Petitioner to hold that its manufacture, supply and installation  

of a lift is a ‘Works Contract’.

85.The  above  conclusion  is  de  hors the  position  that  sub-clause  

(zzzza) of Sub-section 105 of Section 65 came to be introduced under  

the Finance Act of 2007, which came into force w.e.f. 11.05.2007.  It  

should also be noted that Section 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  LIFT  or  

Escalator is independently carried out by an Agency. According to  

me, by relying upon Section 65 (29), 65 (39a) and Section 105 (zzd),  

the case of the Petitioner cannot be comprehensively answered and  

he  further  cannot  possibly  contend  that  the  contract  should  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.  The  

said  submission  of  the  learned  Counsel  is,  therefore,  liable  to  be  

turned down.   

86.On examination of the various decisions, which were relied upon  

by the learned Senior Counsel, the first case was the Division Bench

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decision of the Bombay High Court in OTIS Elevators Co. (India)  

Ltd. (supra). It is true that in the said decision the Bombay High  

Court  dealt  with  the  very  same  issue,  namely,  whether  supply,  

erection, installation of LIFT by the Petitioner would fall  within the  

definition of ‘Works Contract’ or a ‘Sale’.  The Division Bench of the  

Bombay  High  Court  posed  two  questions  for  consideration.  The  

questions were:

“1. Whether on the facts and in the circumstances of the  case, the Tribunal was justified in holding that the contract  dated 10.06.1958 between the applicants and M/s Tea Manak  and Co. was a composite and divisible contract, one for the  sale of goods in which the property has passed and the other  for  labour  and  service  charges  for  the  installation  of  the  goods so sold.   

2. Whether the said contract was one and indivisible contract  for work and labour.”

87.While examining the above two questions apart from the various  

terms of the contract, the Division Bench has referred to a very vital  

term  in  the  contract,  which  again  related  to  the  payment  of  

consideration.  The said term has been extracted at page 531, which  

reads as under:

“531. We  propose  to  furnish  and  erect  the  elevator,  installation  outlined  in  the  foregoing  specifications  for  the sum of price of two passenger lifts  as above duly  delivered and erected at site @ Rs.28,156/- each.”

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88.The  Division  Bench,  thereafter,  noted  clause  (iv)  of  the  

Agreement, which related to the payment of price.  The said clause  

was as under:

“30%  within  30  days  of  the  builders  accepting  the  proposal; 60% on receipt of shipping documents from  the applicants’ factories; and the remaining 10% (+) or  (–) any adjustments required on completion of erection  or  in  any  case  within  6  months  of  delivery  of  equipment.”

89. After referring to the above clauses in the agreement and also  

the  various  decisions  relied  upon  by  the  respective  parties,  the  

Division  Bench  noted  the  contention  of  the  Department  and  the  

substance of the contention of the Department was as under:

“We have already referred to  the contention of  the  Department  that  in  view  of  the  proportion  of  cost  separately  indicated  for  the  material  as  against  labour, and the use of the word ‘price’ in describing  the  consideration  for  the  supply,  erection  and  installation of the lifts the intention of the parties was  to sell the goods.”

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90.While  dealing  with  the  said  contention,  the  Division  Bench  

observed as under:

“In the ultimate analysis in this case the form in which  services are rendered does not permit its severance into  two compartments.  In this connection, there are certain  factors  which  have  relevance  in  determining  the  intention of the parties.  The time-limit fixed for doing  the work, the mention of and all-inclusive price for the  totality  of  the  materials  and  services  rendered, the  absence  of  an  agreement  for  the  sale  of  chattel  as  chattel,  the  point  of  time  when,  the  property  in  the  goods passed from the applicants to the opposite party,  the nature of the contract undertaken by the Applicants  under  and  the  indivisibility  of  the  contract,  are  all  factors which would indicate what should be the proper  construction of the contract entered into between the  parties.”

91.The Division Bench then felt it necessary to examine the terms of  

the  contract  and  the  surrounding  circumstances  and  ultimately  

reached its conclusion as under:

“In  this  connection  the  mode  of  payment  set  out  in  clause 4 is also pertinent.  Under that clause 30% of the  price was to be paid within 30 days from the date of the  acceptance  of  the  proposal,  60% was  to  be  paid  on  receipt of shipping documents from the factories, and  the  remaining  10%  had  to  be  paid,  subject  to  adjustments required, on completion of the erection, or,  in  any case,  within six months of  the delivery of  the

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equipment,  if  the  erection  was  delayed  due  to  the  reasons beyond their control.  This is more consistent  with and all-inclusive price being fixed irrespective of  the  materials  supplied  from  time  to  time  with  the  building contractors.”  

92. The answers to the questions were ultimately made at the end of  

the judgment to the following effect:

“In the result, we answer the questions referred to us  as follows:-

Question No.(1) in the negative.

Question No.(2) in the affirmative.”

93.The  Division  Bench  ultimately  held  that  the  contract  was  a  

composite  and  indivisible  contract  for  work  and  labour  and,  

therefore,  no  sale  of  goods  can  be  spelt  out  of  the  contract.  As  

observed from the said judgment, the Division Bench has noted the  

agreed terms of the parties, which stated that the proposal was to  

manufacture/erect/install  the  elevator,  for  which  the  price  was  

agreed upon. The payment term also made it clear that the entirety  

of the payment would be made on completion of the erection or in  

any case within  six  months  of  delivery  of  the equipment.   It  has

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further noted that the price was all inclusive for supply, erection and  

installation which were the specific terms of the contract.  Therefore,  

the said judgment having regard to the special facts, namely, the  

specific terms contained in the contract as between the parties, can  

have no application to the facts of this case.  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  

been explained in detail and have no relation to any service to be  

performed  by  the  Petitioner  by  way  of  the  agreed  terms  of  the  

contract. The said decision is, therefore, of no assistance to the case  

of  the  Petitioner.   In  any  event,  if  it  is  argued  that  the  contract  

involved in the said decision is identical to the case on hand, as it  

has  been  found  and  held  that  the  terms  of  the  contract  is  not  

persuasive enough to call it a ‘Works Contract’, the said decision will  

no longer hold good.

94.Before analyzing the various other decisions relied upon by either  

side, having regard to the above conclusion that the manufacture,  

supply and installation of LIFT by the Petitioner would constitute a  

‘Sale’  and not  ‘Works  Contract’,  a  reference  can be made to  the

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reasoning, which weighed with the learned Judges in the judgment  

rendered in Kone Elevators (India) Pvt. Ltd. (supra). In the said  

judgment  this  very  question  which  has  been  referred  to  this  

Constitution  Bench  directly  arose  for  consideration.  The  present  

Petitioner  when  submitted  its  returns  under  the  provisions  of  the  

Andhra Pradesh General Sales Tax Act, 1957 for the period 1.04.1995  

to  31.05.1995  and  01.06.1995  to  31.07.1995,  provisional  

assessments  were  made by  the  Commercial  Tax  Officer  by  order  

dated 19.08.1995 and 05.09.1995, respectively.   The claim of the  

Petitioner by way of deductions of labour charges for composition of  

Tax under Section 5G read with Section 5F of the said Act, on the  

ground that the nature of work undertaken by it constitutes a ‘Works  

Contract’, was rejected by the Assessing Authority holding that the  

same amounted to ‘Sale’. The appeal preferred by the Petitioner was  

also  rejected.   The further  appeal  to  the  Tribunal  was  allowed in  

favour of the assessee holding that the activities of the Petitioner  

would fall within the expression ‘Works Contract’ and not ‘Sale’. The  

Department’s challenge in the High Court also ended in a failure. In  

an  appeal  preferred  by  the  Department  before  this  Court,  after  

applying the effect of sub-article (29A)(b) of Article 366 and also the  

decisions  in Gannon  Dunkerley  (supra), Hindustan  Shipyard

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Ltd.  (supra) etc.,  and  after  making  a  detailed  reference  to  the  

contractual terms it was held as under in paragraph 12:

“12. 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  the  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  would  the  assessee  undertake  installation of lift if the site was 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 delay 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  work  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

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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, indicates 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  were  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, the transactions in question constitute “sale”  in terms of Entry 82 of the First Schedule to the said  Act and, therefore, Section 5-G of the said Act was not  applicable.”

95.It  can  be  concluded  that  the  reasoning  of  this  Court  in  

the above-referred decision is in tune with the law on the subject and  

it  should  be held  that  could  be the  only  reasoning which  can be  

assigned,  having  regard  to  the  nature  of  the  contract  and  the  

relevant provision of law that would apply to such a transaction as

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between  the  Petitioner  and  its  customers.   Therefore,  the  said  

decision should remain as no other view other than what has been  

taken in the said decision is possible. I, thus, affirm the said decision  

and hold that the activity of the Petitioner in the manufacture, supply  

and  installation  of  LIFT/ELEVATOR  is  a  ‘Sale’  and  not  a  ‘Works  

Contract’, having regard to the specific terms of the contract placed  

before this Court.

96.On behalf of the Petitioners, reliance was heavily placed upon the  

three Judge Bench decision of this Court in  Larsen & Toubro Ltd.  

(supra). That decision came to be rendered pursuant to a reference  

by a two judge Bench  of  this  Court  in  K. Raheja Development  

Corporation vs. State of Karnataka,  (2005) 5 SCC 162.  In the  

order  of  reference  dated  19.08.2008,  the  two  judge  Bench  after  

noticing the relevant provisions of the Karnataka Sales Tax Act, 1957  

and the distinction between the ‘contract  of  sale’  and the ‘Works  

Contract’ felt it necessary to refer the question to a larger Bench.  In  

the order of reference, it was held that prima facie it faced difficulty  

in  accepting  the  proposition  laid  down  in  Raheja  Development  

(supra), in particular, paragraph 20, inasmuch as Larsen & Toubro  

being a developer undertook the contract to develop the property of  

one Mr. Dinesh Ranka, owner of the land and subsequently, the show

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cause notice issued to the said assessee proceeded on the basis that  

the tripartite  agreement was a ‘Works Contract’.  Further,  it  noted  

that in the show cause notice there was no allegation made by the  

Department that there was any monetary consideration involved in  

the  first  contract,  which  was  the  Development  Agreement.  The  

reference came before the three Judge Bench to which one of us was  

a party (Honble the Chief Justice of India, Mr. Justice R.M. Lodha).   

97.Before referring to the various reasons in the said judgment, it will  

be appropriate to note the basic facts which were noted in the said  

judgment in paragraph 3, which reads as under:

“3. Of the 26 appeals under consideration before us,  14  are  from  Karnataka  and  12  from  Maharashtra.  Insofar  as  Karnataka  appeals  are  concerned,  it  is  appropriate that we take the facts from the leading  case being Larsen and Toubro.  The ECC division of  Larsen and Toubro  (for  short,  “L&T”)  is  engaged  in  property  development  along  with  the  owners  of  vacant  sites.   On  19.10.1995,  L&T  entered  into  a  development agreement with Dinesh Ranka, owner of  the land bearing survey numbers 90/1, 91, 92 (Part),  94, 95 and 96/1 (Part) together measuring 34 acres all  situated at Kothanur Village, Bengur Hobli, Bangalore  South  Taluk,  Bangalore,  for  construction  of  a  multi- storeyed  apartment  complex.   The  owner  was  to  contribute  his  land  and  L&T  was  to  construct  the  apartment complex.  After development, 25% of the  total space was to belong to the owner and 75% to  L&T.  A power of attorney  was executed by the owner  of the land in favour of L&T to enable it to negotiate

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and book orders from the prospective Purchasers for  allotment of built up area.  Accordingly, L&T entered  into  agreements  of  sale  with  intended  Purchasers.  The agreements provided that on completion of the  construction, the apartments would be handed over to  the Purchasers who will  get an undivided interest in  the  land  also.   Sale  deeds,  thus,  were  executed  in  favour  of  the  intended  Purchasers  by  L&T  and  the  owner.”

98.In the said case on behalf of Larsen and Toubro, it was argued  

that the Developer and the owner were on the one side, while the  

Purchaser  was  on  the  other  side,  that  there  was  no  monetary  

consideration  so  far  as  the  contract  between  the  Developer  was  

concerned and the owner and that the only transaction was by the  

Developer/Owner to the prospective Purchaser after the construction  

of the flat and, therefore, there was only a sale element of the Flat  

along  with  the  undivided  share  of  the  land  jointly  by  the  

Developer/Owner in favour of the prospective Purchaser.  Hence, it  

was claimed that the agreement can only be construed as ‘Sale’ and  

not a ‘Works Contract’. It was also contended on the above footing as  

under:

“21.  ….Conversely  a  suit  by  an  owner/developer  against the flat Purchaser would be for payment of  consideration of  the flat/  fractional  interest  in the

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land.  Such suit would never be for payment of work  done  at  the  behest  of  the  flat  Purchaser  and  payment  of  consideration  therefor.   It  is,  thus,  submitted  that  the  judgment  in  Raheja  Development  does  not  lay  down  good  law  and  deserves to be overruled.”

99.On the other hand, another learned counsel submitted that in a  

composite  works  contract  transfer  of  immovable  property  will  not  

denude  it  of  its  character  of  ‘Works  Contract’  and  that  Article  

366(29A)(b)  takes  care  of  such  situations  where  the  goods  are  

transferred in the form of immovable property.  

100. While dealing with the reference, the various contentions were  

noted in the first  instance and while  examining the implication of  

Article 366(29A)(b), it was observed in paragraph 60:

“60.….in other words goods which have by incorporation  become  part  of  immovable  property  or  deemed  as  goods the definition of Tax on the sale and purchase of  sale includes tax on the transfer of the 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 works contract.”  

101.    Thereafter, in paragraph 61 it was further observed as under:

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“61. Viewed thus, a transfer of property in goods under  clause 29-A(b) of Article 366 is deemed to be a sale of  the 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.”

102. In  paragraph  63  while  interpreting  the  effect  of  Article  366  

(29A)(b),  which  was  brought  into  the  Constitution  by  the  46th  

Amendment,  the  Bench  held  that  tax  on the sale  or  purchase  of  

goods may include a tax on the transfer in goods as goods or in a  

form  other  than  goods  involved  in  the  execution  of  the  works  

contract.   It  was also held that it  would be open to the States to  

divide the works contract into two separate contracts by legal fiction,  

namely:  

(ii) Contract for Sale of Goods involved in the works  contract and  

(ii) For supply of the labour and service.  

103. It  was  then  observed  that  by  implication  of  the  46th  

Amendment, States have been empowered to bifurcate the contract  

and to levy sales tax on the value of the material in the execution of  

the works contract by holding it to be a deemed sale.

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104. As far as the implication of Article 366(29A)(b) after the 46th  

Amendment as held above is concerned, the same cannot be faulted.  

However, at this juncture, it will have to be kept in mind that in that  

decision,  this  Court  was  dealing  with  a  contract  relating  to  

development of land in which, the Developer and owner of the land  

and the prospective Purchaser after the development in the form of  

constructed building units were parties. By virtue of the nature of the  

contract and its terms, immovable property in the form of a building  

ultimately emerged in the land in question where substantial use of  

materials in the form of goods was involved for which equal amount  

of  labour  was  also  employed.  It  was  in  that  context  the  said  

judgment came to be rendered. In fact, this court has noted that in  

the peculiar facts of that case, the goods employed became part of  

the immovable property and in the ultimate process lost its form as  

goods.

105. In  the  above-stated  background  of  the  said  case,  what  is  

relevant to be examined is, in order to invoke Article 366 (29A)(b), it  

will have to be found out whether a contract will fall within the four  

corners of the expression ‘Works Contract’. Therefore, the endeavour  

is  to  find  out  the principles  that  have been stated in  the various  

decisions,  including  in  the  decision  of  Larsen  &  Toubro  Ltd.

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(supra), so that such principles can be applied to the case on hand  

to ascertain the nature of the contract. Keeping the said perception  

in mind, a detailed reading of the decision in Larsen & Toubro Ltd.  

(supra) can be made.  

106  In paragraph 65 of the said decision reference was made to  

Bharat Sanchar (supra), wherein sub-clause (d) of Clause 29A of  

Article 366 came to be considered.  It was laid down therein that all  

the sub-clauses of Article 366(29A) serve to bring transactions where  

essential ingredients of a ‘Sale’ as defined in the Sale of Goods Act,  

1930  are  absent,  within  the  ambit  of  sale  or  purchase  for  the  

purposes of  levy sales tax.  The said proposition stated in  Bharat  

Sanchar (supra) would only go to show that before invoking Article  

366  (29A),  the  concerned  transactions  ought  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 are present or not.  In the event of such element of ‘Sale’ not  

being present, then alone Article 366(29A)(b) would get attracted for  

the  purpose  of  applying  the  principle  of  deemed  sale.  I  find  no  

relevance in paragraph 76 of the said decision where this Court laid  

down  as  to  what  nature  of  contract  can  be  called  as  a  ‘Works

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Contract’ falling under the said definition vis-a-vis  Article 366 (29A)

(b).  Paragraph 76 reads as under:  

“76. In  our  opinion,  the  term  ‘Works  Contract’  in  Article  366(29A)(b)  is  amply  wide  and  cannot  be  confined to a particular understanding of the term or  to a particular form. The term encompasses a wide  range  and  many  varieties  of  contract.  The  Parliament  had  such  wide  meaning  of  ‘Works  Contract’  in  its  view  at  the  time  of  Forty-sixth  Amendment. The object of insertion of clause 29A in  Article  366  was  to  enlarge  the  scope  of  the  expression ‘tax  of  sale or  purchase  of  goods’  and  overcome Gannon Dunkerley-13. Seen thus, 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.  The additional obligations in the contract would not  alter the nature of contract so long as the contract  provides for a contract  for works and satisfies the  primary  description  of  works  contract.  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’.  Nothing in Article  366(29A) (b) limits the term ‘Works Contract’ to contract for  labor and service only. Learned Advocate General for  Maharashtra  was  right  in  his  submission  that  the  term  ‘Works  Contract’  cannot  be  confined  to  a  contract  to  provide  labour  and  services  but  is  a  contract  for undertaking or bringing into existence  some ‘works’. We are  also  in  agreement  with  the  submission  of  Mr.  K.N.  Bhat  that  the  term ‘Works  Contract’ in Article 366(29A)(b) takes within its fold  all genre of works contract and is not restricted to

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one  specie  of  contract  to  provide  for  labour  and  services  above.  The  Parliament  had  all  genre  of  works  contract  in  view  when  clause  29A  was  inserted in Article 366.” (Underlining is mine)

107.  While examining the above reasoning to ascertain a contract  

as to whether it is  ‘Works Contract’  or ‘Sale’,  it  is  stated that the  

characteristics of ‘Works Contract’ would be satisfied in a contract  

irrespective  of  any  additional  obligations.  In  other  words,  while  

applying Article 366(29A)(b), it should not be limited to a contract for  

labour  and  service  only.  It  was  further  held  that  it  could  not  be  

confined  to  a  contract  to  provide  labour  and  services,  but  if  a  

contract is for undertaking and bringing into existence some element  

of ‘works’,  though the contract may be for supply of goods, it will  

become a ‘Works Contract’. With great respect, it will have to be held  

that  such  a  sweeping  interpretation  may  not  be  appropriate  for  

invoking Article 366(29A)(b). I say so because 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  insignificant  services  

rendered alone, cannot be the basis to hold the entire contract to be  

a ‘Works Contract’.

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108. In this context, it will be relevant to note that in the execution  

of the present contract, the property in the goods would not loose its  

form as ‘goods’ as compared to a contract for development of a land  

into flats. What would be available after the ultimate conclusion or  

implementation of the contract would be an immovable property in  

the  form of  a  building  and  the  goods  employed  in  the  course  of  

execution of such contract, might have lost its character as goods  

such  as  bricks,  cement,  sand,  steel,  fittings  etc.  Therefore,  as  a  

general  proposition of  law,  it  will  not  be appropriate  to  hold  that  

wherever  an  element  of  works  is  involved  irrespective  of  its  

magnitude, all contracts should be held to be ‘Works Contract’. Since  

the argument made by the Advocate General of Maharashtra, which  

weighed with the learned Judges in the said decision does not appear  

to be an appropriate reasoning, it will have to be held that such a  

proposition laid in paragraph 76 to hold every contract  as ‘Works  

Contract’ based on a minuscule element of ‘works’ involved cannot  

be accepted.

109. In  paragraph 66  of  Larsen & Toubro Ltd.  (supra),  it  was  

observed  that  in  Bharat  Sanchar (supra),  this  Court  reiterated  

what was stated earlier in Associated Cement Companies Ltd. vs.  

Commissioner  of  Customs (2001)  4  SCC 593  that  ‘Dominant

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Nature Test’ has no application to a composite transaction covered  

by the Clauses of Article 366(29A). Therefore, it was concluded that  

there was no ambiguity in stating that after the 46th Amendment the  

sale element of those contracts which are covered by six sub-clauses  

of Clause 29A 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’  being applied.  With  great  

respect,  it  will  have  to  be  stated  that  what  was  omitted  to  be  

considered, was as to in the first instance, whether a contract would  

fall  within  the  four  corners  of  ‘Works  Contract’  by  virtue  of  the  

essential  ingredients  of  that  very  contract.  Even  by  referring  to  

Bharat  Sanchar (supra), before  finding  out  the  application  of  

Article 366(29A), it will have to be seen whether the transaction and  

essential ingredients of ‘Sale’ as defined in the Sale of Goods Act are  

present or absent for the purpose of levy of sales tax. In other words,  

if the essential ingredients of ‘Sale’ as defined in the Sale of Goods  

Act  are  present,  then  going  by  the  ratio  laid  down  in  Bharat  

Sanchar (supra), the  application  of  Article  366(29A)  will  not  be  

available. Therefore, 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

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Court to hold whether the element of ‘Sale’ that would fall within the  

definition of ‘Sale’ under the Sale of Goods Act is present.  In this  

event,  the  question  of  construing  the  said  contract  as  a  ‘Works  

Contract’ covered by Article 366(29A) cannot be made. In fact, in the  

earlier part of this judgment a detailed reference has been made to  

the  various  terms  of  the  contract  to  find  out  as  to  whether  the  

element of sale was present or not.  It has been held that by virtue of  

the essential 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.  

110.   In Larsen & Toubro Ltd. (supra), this Court rightly noted in  

paragraph 72 that to attract Article 366(29A)(b) there has to be a  

‘Works Contract’ and what is its meaning should also be found out. It  

was  further  held  that  the  term  ‘Works  Contract’  needs  to  be  

understood in a manner that the Parliament had in its view at the  

time  of  introducing  the  46th Amendment  and  which  is  more  

appropriate  to  Article  366(29A)(b).  Reference  can  be  made  to  

paragraph 76, which has been extracted in paragraph 102 of this  

judgment.

111.   In fact, I find that in the abovesaid paragraph in  Larsen &  

Toubro  Ltd.  (supra), it  was  ultimately  held  by  accepting  the

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argument of the learned Advocate General of Maharashtra that the  

term ‘Works Contract’ cannot be confined to a contract to provide  

labour and services alone. The said conclusion having regard to the  

nature of contract which was dealt with in the said judgment could  

not be in any way contradicted since as noted earlier, in  Larsen &  

Toubro  Ltd.  (supra) the  contract  related  to  development  of  a  

property  which  consisted  of  the  developer,  the  owner  and  the  

prospective Purchasers of the ultimate building units constructed. In  

that  context,  whatever  held  in  paragraph 76 to  the  effect  that  a  

contract which was undertaken to bring into existence some element  

of works, would be sufficient to hold the said as a ‘Works Contract’,  

would be perfectly in order. The question is as to whether such a  

ratio can be applied universally to every other contract where some  

miniscule or insignificant element of works is involved. In fact, in the  

case on hand 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 Article  

366(29A). Therefore, the principle stated in paragraph 76 of Larsen  

& Toubro Ltd. (supra) would apply in the peculiar facts relating to  

that case where it related to construction of a building by virtue of

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the contract between the developer and owner on the one side and  

the prospective Purchaser on the other side. It is difficult to apply the  

said ratio rendered in the context of the said contract as applicable  

universally in all sorts of contracts where some element of work is  

involved  and  state  that  such  contract  would  also  fall  within  the  

definition of ‘Works Contract’.

112.   The said conclusion is also fully supported by the reasoning in  

Larsen & Toubro Ltd. (supra), as held in paragraph 94, which is to  

the following effect:

“94. For  sustaining  the  levy  of  tax  on  the  goods  deemed to  have  been sold  in  execution  of  a  works  contract,  in  our  opinion,  three  conditions  must  be  fulfilled:  (i)  there  must  be a works  contract, (ii)  the  goods should have been involved in the execution of a  works contract,  and (iii)  the property in those goods  must be transferred to a third party either as goods or  in  some  other  form.  In  a  building  contract  or  any  contract to do construction, the above three things are  fully  met. In  a  contract  to  build  a  flat  there  will  necessarily  be  a  sale  of  goods  element.  Works  contracts also include building contracts and therefore  without any fear of contradiction it can be stated that  building contracts are species of the works contract.  (Underlining is mine)

113.   A  reading  of  the  above  paragraph,  thus  discloses  three  

conditions and that  at  the foremost a  contract  must  be a ‘Works

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Contract’ and in that contract in the course of its execution, goods  

must have been applied and the property in those goods ultimately  

gets transferred either as goods or in some other form. If the said  

condition  is  not  fulfilled,  the  other  two  conditions  will  have  no  

application. Therefore, the above principles stated in paragraph 94 of  

Larsen  &  Toubro  Ltd.  (supra) are  applied  to  the  contract-

necessarily an exercise has to be carried out to find out whether the  

contract  was  a  ‘Works  Contract’  or  not.  Having  regard  to  the  

essential ingredients of the contractual terms, it is difficult to hold  

that the supply of LIFT by the Petitioner to its Purchaser can be called  

as a ‘Works Contract’ and, therefore, since the very first condition is  

not fulfilled, the other conditions are of no consequence in order to  

invoke Article 366(29A)(b) to the case on hand.

114.  Even  when  the  ultimate  conclusion  as  noted  in  paragraph  

101(x) is applied, the supply of LIFT by the Petitioner to its Purchaser  

satisfies the definition of ‘Sale’ as defined under the Sale of Goods  

Act,  and,  therefore,  the  question  of  deemed  sale  does  not  arise.  

Analyzing the decision from all frontiers it can be concluded that the  

ratio laid down in Larsen & Toubro Ltd. (supra) which related to a  

construction contract, cannot be applied to the case on hand, and

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therefore,  would not be a sufficient reasoning to hold the present  

contract as ‘Works Contract’.

115.   Once  the  application  of  Larsen  &  Toubro  Ltd.  (supra)  

judgment to the facts of this case has been steered clear, next it is to  

be found out as to whether the other judgments relied upon by the  

learned  Senior  Counsel  for  the  Petitioner  support  his  submission,  

claiming  that  the  transaction,  namely,  manufacture,  supply  and  

installation of LIFT is a ‘Works Contract’ or not. Reliance was placed  

upon  the  decision  of  this  Court  in  Richardson  Cruddas  Ltd.  

(supra).  In  order  to  note  the  distinction  as  to  the  nature  of  the  

contract in that case as compared to the present one, the relevant  

paragraph in  page 249 can be usefully  extracted which  reads  as  

under:

“249.There is no formal contract in the present case for  fabrication and erection of the steel structures required  by the society.  The agreement between the parties has  to  be  ascertained  from  the  correspondence  between  them.  The correspondence may be briefly referred to.  By  letter  dated  December  4,  1956  the  Corporative  Society informed the Respondents that they had placed  an  order  for  a  sugar  plant  and  machinery  for  manufacture  of  sugar  and  they  had  to  design  the  factory.” (Underlining is mine)

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116.   Therefore,  the  above  passage  in  the  said  judgment  itself  

discloses that the contract itself had to be understood based on the  

correspondence  as  between  the  parties.   There  was  no  formal  

contract  in  any  event.  What  was  required  to  be  fulfilled  by  the  

Respondent was setting up of a sugar plant and machinery for the  

manufacturing of sugar and that too to be decided by the contractor.  

It is difficult to understand as to how the conclusion reached in the  

said case based on the above contract could be applied to the case  

on  hand.   In  the  present  case,  the  contract  was  put  into  writing  

containing various clauses and conditions which were elaborate and  

definite to the effect that the Petitioner should manufacture, supply  

and then erect a product, namely, the LIFT.  Apart from setting up of  

a  sugar  plant  in  Richardson Cruddas  (supra), the  parties  also  

agreed  for  supply  of  fabrication  and  installation  of  bottle  cooling  

equipment  at  the premises  of  the customer.  While  describing  the  

said contract, it was held in page 251 that the contractor fabricated  

the component parts according to the requirements and specification  

of  the  customer  and  installed  the  same  on  a  suitable  base  and  

foundation at the premises of the customer.   It  was held that the  

installation of the bottle cooling unit in the premises of the customer  

was not merely ancillary or incidental to the supply of the unit.  Here

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again  it  was  noted  that  for  the  installation  of  bottle  cooling  

equipment also, there was no formal written contract and the terms  

of the contract had to be gathered from the correspondence.  Having  

regard to  such a  nature  of  contract  which  was dealt  with  in  that  

decision, it will have to be held that it will not be safe to apply the  

said ruling to the facts of this case where 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.

117.   Mr.  Dwivedi,  learned Senior Counsel  appearing for State of  

Orissa  in  support  of  his  submission  relied  upon  the  Constitution  

Bench  decision  of  this  Court  in  M/s.  Patnaik  and  Company  

(supra).  In paragraph 28 as a proposition of law, the Constitution  

Bench has held as under:

“28. In  Commissioner of Sales Tax, U.P. v.  Haji Abdul  Majid [1963] 14 STC 435 (All), the Allahabad High Court  arrived at the conclusion that in the circumstances of  the case the transaction was a contract for the sale of  bus  bodies  and  not  a  contract  for  work  and  labour.  Desai, C.J., rightly pointed out at p. 443 that “since it  makes  no  difference  whether  an  article  is  a  ready-  made article or is prepared according to the customer's  specification, it should also make no difference whether  the assessee prepares it separately from the thing and  then  fixes  it  on  it  or  does  the  preparation  and  the  fixation simultaneously in one operation.”

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118   Thereafter, while repelling the contention made on behalf of  

the Appellant in that case, it was held as under:

“31. To  constitute  a  sale  there  must  therefore  be  an  agreement and  in  performance  of  the  agreement  property belonging to one party must stand transferred to  the other party for money consideration. Mere transfer of  property in goods used in the performance of a contract  is, however, not sufficient: to constitute a sale there must  be an agreement — express or implied — relating to sale  of goods and completion of the agreement by passing of  title in the very goods contracted to be sold.  It is of the  essence of the transaction that the agreement and sale  should relate to the same subject-matter i.e. the goods  agreed  to  be  sold  and  in  which  the  property  is  transferred.” (Emphasis Added)

119.    Going by the above dictum of the Constitution Bench of this  

Court, the contract as a whole will have to be examined to see as to  

what was the real intention of the parties. In my opinion, the said  

legal principle will continue to apply even after the 46th Amendment  

while examining each case to find out as to whether the contractual  

terms would persuade the Court to hold that the said contract as a  

whole would fall within the definition of ‘Works Contract’. This Court  

in  paragraph  31  rejected  the  submission  of  the  counsel  for  the  

Appellant  and  clearly  pointed  out  the  distinction  as  between  a  

building contract and a contract for supply of a chattel as a chattel. I

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am in full agreement with the proposition of law laid down in the said  

decision, which fully supports my conclusion.   

120.     The learned Senior Counsel also relied upon the decision in  

M/s. T.V. Sundaram Iyengar (supra). Paragraph 7 is relevant for  

the case on hand where  the principle  has been laid  down,  which  

reads as under:

“7. The question with which we are concerned, as would  appear from the resume of facts given above, is whether  the construction of the bus bodies and the supply of the  same  by  the  assessees  to  their  customers  was  in  pursuance of a contract of sale as distinguished from a  contract for work and labour. The distinction between the  two contracts is often a fine one. A contract of sale is a  contract whose main object is the transfer of the property  in, and the delivery of the possession of, a chattel as a  chattel  to  the  buyer.  Where  the  main  object  of  work  undertaken by the payee of the price is not the transfer of  a chattel  qua chattel,  the contract  is  one for work and  labour. The test is  whether  or not the work and labour  bestowed end in anything that can properly become the  subject of sale; neither the ownership of the 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.” (Emphasis Added)

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121.  When the above principles are applied to the facts of this case,  

it  can  be  aptly  held  that  the  present  contract  is  nothing  but  a  

contract for ‘Sale’ and not a ‘Works Contract’.  

122.  A profitable reference can also be made to another Constitution  

Bench  decision  of  this  Court  in  Commissioner  of  Commercial  

Taxes Mysore,  Bangalore (supra).  The  question  that  arose for  

consideration  was  as  to  whether  construction  of  railway  coaches  

from the materials belonging to railways under a contract is a sale or  

works contract.  Dealing with the said question,  this  Court  held as  

under in paragraphs 12 and 13:

“12. On these facts we have to decide whether there has  been any sale of the coaches within the meaning of the  Central Sales Tax Act.  We were referred to a number of  cases of this Court and the High Courts, but it seems to  us that the answer must depend upon the terms of the  contract. The  answer  to  the  question  whether  it  is  a  works contract or it is a contract of sale  depends upon  the construction of the terms of the contract in the light  of the surrounding circumstances. In this case the salient  features of the contract are as follows: ‘(1) …….. (2) ……… (3) ……… (4) ……… (5) ……… (6) ……… (7) …….’

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13. On these facts it seems to us that it is a pure works  contract. We  are  unable  to  agree  that  when  all  the  material used in the construction of a coach belongs to  the Railways there can be any sale of the coach itself.  The difference between the price of a coach and the cost  of material can only be the cost of services rendered by  the assessee. If it is necessary to refer to a case which is  close to the facts of this case, then this case is more in  line with the decision of this Court in State of Gujarat v.  Kailash  Engineering  Co.  than  any  other  case.”  (Emphasis Added)

123.  It can be discerned from the abovementioned case that having  

regard to the specific terms of the contract, which inter alia  states  

that the material used for construction of coaches before its use was  

the property of the railways and the contract substantially related to  

the  service  or  works  to  be  rendered  by  the  contractor  for  the  

construction  of  the  coaches,  it  was,  therefore,  held  that  it  was  a  

‘Works Contract’ and not a ‘Sale’. However, it was categorically held  

that  the  question  whether  a  contract  is  a  ‘Works  Contract’  or  a  

contract of ‘Sale’ depends upon the conception of the terms of the  

contract  in  the  light  of  the  surrounding  circumstances.  Therefore,  

applying the above principle to the case on hand, I am convinced  

that by virtue of the terms as has been noted in the earlier part of  

this judgment, the manufacture, supply and installation of a LIFT is a  

contract for ‘Sale’ and not a ‘Works Contract’.

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124.  Mr. Dwivedi, learned Senior Counsel also placed reliance upon  

the three Judge Bench decision of this Court in  The Central India  

Machinery  Manufacturing  Company  Limited (supra).  An  

identical question has arisen for our consideration, namely, whether  

manufacture and supply of wagons by way of a contract between  

Union of India and Central India Machinery Manufacturing Company  

Limited was a contract of ‘Sale’ or ‘Works Contract’. Dealing with the  

said question,  this  Court after  making a detailed reference to the  

various  terms  of  the  contract  as  between  the  Appellant  and  

Respondent therein, held as under in paragraphs 31 and 32:

“31. The upshot of the above discussion is that with  the  exception  of  wheelsets  (with  axle  boxes  and  couples),  substantially  all  the raw materials  required  for  the  construction  of  the  wagons  before  their  use  belong  to  the  Company  and  not  to  the  President/Railway  Board.  In  other  words  with  the  exception  of  a  relatively  small  proportion  of  the  components  supplied  under  Special  Condition  6,  the  entire wagons including the material at the time of its  completion for delivery is the property of the Company.  This means that the general test suggested by Pollock  and  Chalmers  has  been  substantially  albeit  not  absolutely satisfied so as to indicate that the contract  in question was one for the sale of wagons for a price,  the  Company  being  the  seller  and  the  President/Railway Board being the buyer. It is true that  technically the entire wagon including all the material  and  components  used  in  its  construction  cannot  be  said to be the sole property of the Company before its

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delivery to the Purchaser. But as pointed out by Lord  Halsbury  in  the  above  quoted  passage  from  his  renowned work neither the ownership of the materials  nor the value of the skill and labour as compared with  the value of the materials used in the manufacture is  conclusive.  Nevertheless,  if  the  bulk  of  the  material  used in the construction belongs to the manufacturer  who sells  the end product  for  a  price  that  will  be a  strong pointer to the conclusion that the contract is in  substance one for the sale of goods and not one for  work and labour.

32. Be that as it may clause (1) of Standard Condition  15 dispels all doubt with regard to the nature of the  contract. This clause stipulates in unmistakable terms  that  as  soon  as  a  vehicle  has  been  completed,  the  Company will get it examined by the Inspecting Officer  and submit to the Purchaser an “On Account” Bill for  90% of the value of the vehicle and within 14 days of  the receipt of such bill together with a certificate of the  Inspecting Officer, the Purchaser will pay 90% bill and  on such payment, the vehicle in question will become  the  property  of  the  Purchaser.  There  could  be  no  clearer expression of the intention of the contracting  parties  than  this  clause  that  the  contract  was,  in  substance, one for the sale of manufactured wagons by  the  Company  for  a  stipulated  price.”  (Emphasis  Added)

125.   I find that the ratio laid therein mutatis mutandis apply to the  

facts of this case. In fact, in the said decision the Constitution Bench  

decision of this Court in  M/s. Patnaik and Company (supra) was  

followed. Therefore, it has now become clear to the effect that such

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contract for manufacture, supply and installation of LIFT is nothing  

but a ‘Sale’ and not a ‘Works Contract’.

126.    Mr. Salve, learned Senior Counsel in his submissions placed  

reliance  upon  a  Division  Bench  judgment  of  this  Court  in  M/s  

Vanguard Rolling Shutters and Steel Works (supra). That was  

a  case  where  the  question  of  law was  as  to  ‘whether  under  the  

circumstances of the case and under the terms of the contract the  

supply of shutters related and iron gats worth Rs.1,08,633.08/- was  

sale or amounted to ‘Works Contract’. The Appellant therein was a  

contractor dealing in fabrication of rolling shutters and steel works  

who used to manufacture iron shutters according to specifications  

given  by  the  parties  and  fix  the  same  at  the  premises  of  the  

customers.  This  Court  after  considering  the terms of  the contract  

took the view that the same would amount to a ‘Works Contract’ and  

not ‘Sale’. However, in paragraph 2, the principle to be applied to  

find an answer to such a question has been set out as under:

“2…….The question as to under what circumstances  a contract can be said to be a work contract is not  free from difficulty and has to depend on the facts of  each  case. It  is  difficult  to  lay  down  any  rule  of  universal  application,  but  there  are  some  well  recognised  tests  which  are  laid  down  by  decided  cases  of  this  Court  which  afford  guidelines  for  determining as to whether a contract in question is a

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work contract or a contract for supply of goods. One  of  the  important  tests  is  to  find  out  whether  the  contract  is  primarily  a  contract  for  supply  of  materials at a price agreed to between the parties  for the materials so supplied and the work or service  rendered  is  incidental  to  the  execution  of  the  contract.  If  so,  the  contract  is  one  for  sale  of  materials and the sale proceeds would be eligible to  sales tax. On the other hand where the contract is  primarily  a  contract  for  work  and  labour  and  materials are supplied in execution of such contract,  there is no contract for sale of material but it is a  work contract…….” (Emphasis Added)

127.    Therefore, even as per the above principle stated in the said  

decision and applying the same to the facts of this case, it is found,  

based on the contractual  terms as between the Petitioner and its  

Purchaser  that  the  value  of  the  LIFT  upto  the  extent  of  90%  is  

payable, under certain contingencies, even when such materials are  

made  ready  and  available  for  dispatch  at  the  premises  of  the  

Petitioner. It has also been found based on the terms of the contract  

that the value of the labour content referable to the remaining 10%,  

becomes payable after the installation of the LIFT. That apart in the  

said decision the Constitution Bench decision of this Court in  M/s.  

Patnaik  and  Company  (supra) and  Commissioner  of  

Commercial Taxes Mysore, Bangalore (supra) were not brought

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to the notice of the learned Judges. Therefore, the reliance placed  

upon the said decision is of no assistance to the Petitioner except to  

the general proposition of law propounded in paragraph 2 referred to  

above.

128.    The learned Senior Counsel also relied upon a three Judge  

Bench decision of this Court in  Purshottam Premji (supra). That  

was also a case where the assessee was to quarry stones from the  

quarries  belonging  to  the  South-Eastern  Railways  and  thereafter  

break those stones into pieces and convert them into ballast of a  

specified  size  and  thereafter,  supply  them  to  the  South-Eastern  

Railway.  Dealing with  the said  contract,  it  was held that  it  was a  

‘Works Contract’ and not a ‘Sale’. In paragraph 7, the principle was  

stated as under:

“7. The primary difference between a contract for work  or service and a contract for sale of goods is that in the  former  there  is  in  the  person  performing  work  or  rendering service no property in the thing produced as a  whole notwithstanding that a part or even the whole of  the materials used by him may have been his property.  In the case of a contract for sale, the thing produced as  a whole has individual existence as the sole property of  the party who produced it, at some time before delivery,  and the property therein passes only under the contract  relating thereto in goods used in the performance of the  contract is not sufficient; to constitute a sale there must  be an agreement express or implied relating to the sale

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of goods and completion of the agreement by passing of  title  in  the  very  goods  contracted  to  be  sold…...”  (Emphasis Added)

129.   Even applying the above principle to the case on hand, I find  

that the whole of the materials manufactured for the installation of  

the LIFT belong to the Petitioner and after the installation of the LIFT  

and after receipt of the full payment, the title to the LIFT passes on  

to the Purchaser. Hence, it will have to be held that the contract as  

between the Petitioner and the Purchaser was nothing but a ‘Sale’  

and not a ‘Works Contract’.

130.  Dr. Singhvi, learned Additional Advocate General for Rajasthan  

in  his  submissions  contended  that  to  find  out  an  answer  to  the  

question  whether  the  present  contract  for  supply  of  LIFT  and  its  

installation is a sale or works contract, the test which were invoked  

prior to the 46th Amendment continue to remain. In support of the  

said submission the learned Additional Advocate General relied upon  

a  three  Judge  Bench  decision  of  this  Court  in  Bharat  Sanchar  

(supra). Paragraph 43 of the said judgment is relevant for the case  

on hand, which reads as under:

“43. Gannon  Dunkerley survived  the  Forty-sixth  Constitutional Amendment in two respects. First with  regard to the definition of “sale” for the purposes of

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the  Constitution  in  general  and  for  the  purposes  of  Entry 54 of List  II  in particular except to the extent  that  the  clauses  in  Article  366(29-A)  operate.  By  introducing  separate  categories  of  “deemed  sales”,  the  meaning  of  the  word  “goods”  was  not  altered.  Thus the definitions of the composite elements of a  sale such as intention of the parties, goods, delivery,  etc. would continue to be defined according to known  legal  connotations. This  does  not  mean  that  the  content of the concepts remain static. The courts must  move with the times.  But the Forty-sixth Amendment  does not give a licence, for example, to assume that a  transaction is a sale and then to look around for what  could be the goods. The word “goods” has not been  altered by the Forty-sixth Amendment. That ingredient  of a sale continues to have the same definition. The  second  respect  in  which  Gannon  Dunkerley  has  survived is with reference to the dominant nature test  to be applied to a composite transaction not covered  by Article 366(29-A).  Transactions which are mutant  sales are limited to the clauses of Article 366(29-A). All  other  transactions  would  have  to  qualify  as  sales  within the meaning of the Sales of Goods Act, 1930 for  the purpose of levy of sales tax.” (Emphasis Added)

131.   I am in full agreement with the proposition of law stated in the  

said  paragraph as  regards the tests  to  be applied even after  the  

introduction of Article 366(29A) into the Constitution. Therefore, I am  

convinced that the various tests laid down in the earlier Constitution  

Bench decisions, in particular, the ones which have been relied upon,  

namely,  M/s.  Patnaik  and  Company (supra),  Hindustan  

Aeronautics  Ltd. (supra), The  Central  India  Machinery

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Manufacturing  Company  Limited  (supra) still  hold  good.  

Consequently  the ultimate conclusion  is  that  the present  contract  

between the Petitioner and its Purchaser is one for ‘Sale’ and not  

‘Works Contract’, is justified.

132.   Dr. Singhvi, learned Additional Advocate General also relied  

upon the decision of this Court in Hindustan Shipyard Ltd. (supra)  

wherein  reference  to  Halsbury’s  Laws of  England (4th Edn.  Vol.41,  

para  603)  has  been  noted  to  understand  the  distinction  between  

contract of sale and contract for work and labour. The said paragraph  

as extracted in paragraph 8 of the said judgment can be usefully  

referred to, which reads under:

“8. We  will  shortly  revert  back  to  analysing  the  abovesaid terms and conditions of the contract and in  between try to find out the tests which would enable  determination  of  the  nature  of  the  transactions  covered by such contracts.  The distinction between  contract of sale and contract for work and labour has  been so  stated  in  Halsbury’s  Laws  of  England (4th  Edn., Vol. 41, para 603):

“603.  Contract  of  sale  distinguished  from  contract  for  work  and  labour.—A  contract  of  sale  of  goods  must  be  distinguished  from  a  contract for work and labour. The distinction is  often a fine one. A contract of sale is a contract  the main object of which is the transfer of the  property in, and the delivery of the possession  of, a chattel as such to the buyer. Where the

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main object of work undertaken by the payee of  the price is not the transfer of a chattel as such,  the  contract  is  one  for  work  and  labour.  The  test  is  whether  or  not  the  work  and  labour  bestowed  end  in  anything  that  can  properly  become  the  subject  of  sale.  Neither  the  ownership of the 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.”

133.   It must be stated that when the said principle to ascertain a  

contract  of  ‘Sale’  and  ‘Works  Contract’  is  applied  to  the  case  on  

hand, it can be held that under the contract of the Petitioner with its  

Purchaser, what was agreed was to ultimately supply its product of  

LIFT/ESCALATOR to its customers.  Therefore, after execution of the  

installation  part  of  it,  what  is  transferred  by  the  Petitioner  to  its  

Purchaser is the LIFT as a chattel and this contract is nothing but a  

contract of ‘Sale’.

134.   Mr. K.N. Bhatt, learned Senior Counsel appearing for the State  

of  Karnataka submitted  that  the  question  posed for  consideration  

before  this  Bench  no  longer  survives  in  the  light  of  the  46th  

Amendment,  as  well  as,  the  judgment  of  this  Court  in  Larsen &  

Toubro  Ltd.  (supra).  The  learned  Senior  Counsel  relied  upon

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Builders’ Association of India and others v. Union of India and  

others,  (1989)  2  SCC  645,  which  is  also  a  Constitution  Bench  

judgment, wherein in paragraph 41 it was held as under:

“41. ……..The case-book is full of the illustrations of  the  infinite  variety  of  the  manifestation  of  ‘works  contracts’.  Whatever  might  be  the  situational  differences  of  individual  cases,  the  constitutional  limitations on the taxing power of the State as are  applicable  to  ‘works  contracts’  represented  by  ‘building contracts’  in  the context  of  the expanded  concept of ‘tax on the sale or purchase of goods’ as  constitutionally  defined  under  Article  366(29-A),  would  equally  apply  to  other  species  of  ‘works  contracts’  with  the  requisite  situational  modifications.” (Underlining is mine)

135.    The  learned  Senior  counsel,  fairly  brought  to  our  notice  

paragraph 94 of the judgment in  Larsen & Toubro Ltd. (supra),  

which  has  been  dealt  with  in  paragraph  112  of  this  judgment,  

wherein  it  has  been  concluded  as  a  case  dealing  with  building  

contracts and hence is inapplicable to the case on hand.

136.   While considering this submission of Mr. Bhatt, learned Senior  

Counsel for Karnataka, it can be found in paragraph 94 of Larsen &  

Toubro Ltd. (supra), that the first condition stated therein is that it  

must be a ‘Works Contract’.  Therefore, while all building contracts  

have been held to be ‘Works Contract’ by virtue of the Constitution

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Bench decision in Builders’ Association of India (supra), when it  

comes to the question of other contracts, if the ingredients of Article  

366(29A) are to be applied, the first exercise to be carried out is to  

find out as to whether such contract would fall within the definition of  

‘Works  Contract’.  It  must  be  stated  at  the  risk  of  repetition  that  

simply because some element of work is involved in a contract, it  

cannot be straight away concluded that such contract would become  

a  works  contract,  irrespective  of  the  nature  of  contract,  which  if  

probed into would show that it is a contract for sale. Therefore, even  

going by the decision reported in  Builders Association of India  

(supra),  as well as, the conditions set out in paragraph 94 of the  

Larsen & Toubro Ltd. (supra), it shall be ascertained whether the  

contract of the Petitioner with its Purchaser falls within the definition  

of  ‘Works  Contract’,  in  order  to  apply  the  implication  of  Article  

366(29A). Hence, the said submission of the learned Senior Counsel  

therefore, does not appeal to us.  

137.   A useful reference can also be made to one other decision of  

this  Court  in  Commissioner  of  Sales  Tax,  Gujarat  vs.  M/s.  

Sabarmati Reti Udyog Sahakari Mandali Ltd. reported in (1976)  

3 SCC 592. In paragraph 6, this Court has laid down as to how to find

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an  answer  to  a  question  whether  a  particular  transaction  is  a  

contract of sale or a works contract. The said paragraph is as under:

“6. It  is  well-settled  that  whether  a  particular  transaction is a contract of sale or a works contract  depends upon the true construction of all  the terms  and conditions of  the document,  when there is  one.  The  question  will  depend  upon  the  intention  of  the  parties executing the contract. As we have observed in  our judgment in Civil  Appeal Nos. 1492 and 1493 of  1971  which  we  have  just  delivered  there  is  no  standard  formula  by  which  one  can  distinguish  a  contract of sale from a contract for work and labour.  The question is not always easy and has for all time  vexed  jurists  all  over.  The  distinction  between  a  contract of sale of goods and a contract for work and  labour  is  often  a  fine  one.  A  contract  of  sale  is  a  contract  whose  main  object  is  the  transfer  of  the  property in, and the delivery of the possession of, a  chattel as a chattel to the buyer. (Halsbury’s Laws of  England, 3rd edn., Vol. 34, p. 6) (Emphasis Added)

138.   The  above  paragraph  sufficiently  demonstrates  that  the  

question will depend upon the intention of the parties executing the  

contract and that there can be no standard formula by which one can  

distinguish a contract of sale from a contract of work and labour. The  

said  principle  stated  in  the  above said  paragraph can be applied  

under all situations and since after the 46th Amendment as held in  

Larsen & Toubro Ltd. (supra), the first condition to be found out is

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as  to  whether  a  contract  is  a  ‘Works  Contract’.   It  has  to  be  

necessarily  examined  based  on  the  terms  agreed  between  the  

parties as to what is the intention of the parties. Therefore, applying  

the  above  tests,  since  it  is  found  that  the  present  contract  is  a  

contract for sale, it cannot be held to be a ‘Works Contract’.

139. In support of my conclusion, reliance can also be placed upon  

the majority view of the judgment of this Court in Govt. of Andhra  

Pradesh vs. Guntur Tobaccos Ltd. reported in AIR 1965 SC 1396.  

Paragraph 18 is relevant for the case on hand, which reads as under:

“18. The fact that in the execution of a contract  for work some materials are used and property in  the goods so used passes to the other party, the  contractor  undertaking  to  do  the  work  will  not  necessarily be deemed on that account to sell the  materials. A contract for work in the execution of  which goods are used may take one of three forms.  The  contract  may  be  for  work  to  be  done  for  remuneration and for  supply of  materials  used in  the execution of the works for a price: it may be a  contract for work in which the use of materials is  accessory  or  incidental  to  the  execution  of  the  work: or it may be a contract for work and use or  supply  of  materials  though  not  accessory  to  the  execution of the contract is voluntary or gratuitous.  In the last  class there is  no sale because though  property  passes  it  does  not  pass  for  a  price.  Whether a contract is of the first or the second class  must depend upon the circumstances: if it is of the  first; it is a composite contract for work and sale of  goods: where it  is  of the second category,  it  is  a

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contract for execution of work not involving sale of  goods.”

The above ratio also demonstrates as to how to find out whether a  

contract is a ‘Works Contract’ or one for ‘Sale’.

140.  In light of the above discussions, it will have to be held that  

even  after  the  46th Amendment,  if  Article  366  (29A)(b)  is  to  be  

invoked,  as  a  necessary  concomitant,  it  must  be  shown that  the  

terms of the contract would lead to a conclusion that it is a ‘Works  

Contract’. In other words, unless a contract is proved to be a ‘Works  

Contract’  by  virtue  of  the  terms  agreed  as  between  the  parties,  

invocation  of  Article  366  (29A)(b)  of  the  Constitution,  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, based  

on the conclusions arrived at and having applied the above 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’ and the decision in Kone

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Elevators (India) Pvt. Ltd. (supra) has been correctly  decided.  

The Reference is, therefore, answered on the above terms.

………..…………………………………..J. [Fakkir Mohamed Ibrahim Kalifulla]

New Delhi May 06, 2014

  IN THE SUPREME COURT OF INDIA

CIVIL ORIGINAL/APPELLATE JURISDICTION

WRIT PETITION (C) NO. 232 OF 2005

M/S. Kone Elevator India Pvt. Ltd.      … Petitioner

Versus

State of Tamil Nadu and Ors.     … Respondents

WITH

Writ Petition (Civil) Nos. 298/2005,     487/2005,  528/2005, 67/2006, 511/2006,        75/2007, 519/2008,531/2008,548/2008,      569/2008,

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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,

WITH                         Civil Appeal Nos.  5116-5121   of 2014         (Arising out of SLP (C) Nos. 14148-14153/2005)

WITH                      Civil Appeal Nos. 5135-5141    of 2014          (Arising out of SLP (C) Nos. 14961-14967/2005)

WITH Civil Appeal Nos. 5142-5147 of 2014  

[Arising out of SLP (C) Nos. 17842-17847/2005 WITH

Civil Appeal No. 5152           of 2014    [Arising out of SLP (C) No. 5377/2006

WITH Civil Appeal No.           5153 of 2014    

[Arising out of SLP (C) No. 7037/2006 WITH

Civil Appeal No.           5154 of 2014    [Arising out of SLP (C) No. 30272/2008

WITH Civil Appeal No. 5156           of 2014    

[Arising out of SLP (C) No. 30279/2008 WITH

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217

Civil Appeal No. 5157           of 2014    [Arising out of SLP (C) No. 5289/2009

WITH Civil Appeal Nos. 5159-5160        of 2014    

[Arising out of SLP (C) Nos. 6520-6521/2009 WITH

Civil Appeal Nos. 5162-5164        of 2014    [Arising out of SLP (C) Nos. 4469-4471/2010

WITH Civil Appeal No. 5165           of 2014    

[Arising out of SLP (C) No. 11258/2010 WITH

Civil Appeal No. 5166           of 2014    [Arising out of SLP (C) No. 17228/2010

WITH Civil Appeal Nos. 5167-5168        of 2014    

[Arising out of SLP (C) Nos. 17236-17237/2010

WITH Civil Appeal Nos. 5170-5172  of 2014  

[Arising out of SLP (C) Nos. 23259-23261/2010 WITH

Civil Appeal No. 5174           of 2014    [Arising out of SLP (C) No. 15732/2011

WITH Civil Appeal No.           5175 of 2014    

[Arising out of SLP (C) No. 16466/2011 WITH

Civil Appeal No. 5178           of 2014    [Arising out of SLP (C) No. 16137/2011

WITH Civil Appeal No. 5179           of 2014    

[Arising out of SLP (C) No. 5503/2011 WITH

Civil Appeal No. 5180           of 2014    [Arising out of SLP (C) No. 11147/2011

WITH Civil Appeal Nos. 5181-5192        of 2014    

[Arising out of SLP (C) Nos. 11227-11238/2012

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218

WITH Civil Appeal No. 5193           of 2014    

[Arising out of SLP (C) No. 19901/2013 WITH

Civil Appeal Nos. 5195-5206 of 2014  [Arising out of SLP (C) Nos. 36001-36012/2013 and

WITH                        Civil Appeal No. 6285/2010   

O R D E R

Keeping  in  view  the  conclusions  of  the  majority,  

expressed in the judgment of Dipak Misra, J., it is held that  

the  decision  rendered  in  State  of  A.P.  v.  Kone  

Elevators46 does not correctly lay down the law and it is  

accordingly overruled.

2. 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.   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  

46 (2005) 3 SCC 389

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assessments are challenged in appeal or revision, the same  

shall be decided in accordance with the decision rendered  

by us.

3. The writ petitions and the civil appeals are disposed of  with no order as to costs.

………………………………….....…CJI. [R.M. Lodha]

…………………………………….………J. [A.K. Patnaik]

……………………………………….……J.                                      [Sudhansu Jyoti Mukhopadhaya]

……………………………………….……J. [Dipak Misra]

……………………………………….……J.                                      [F.M. Ibrahim Kalifulla]

New Delhi; May 06, 2014.