Kone Elevators - little inclined - towards Revenue?
YESTERDAY we reported a landmark judgement of a five judge bench of the Supreme Court in
When you get a lift for your apartment, are you buying a product called a lift or are you buying the services of getting a lift installed in your premises?
Are you liable to pay
1. Excise Duty
2. VAT
3. Service Tax
4. Works Contract Tax
5. One or more of the above.
In State of AP v Kone Elevators - - a three member bench of the Supreme Court observed that 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'.
It was also 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 was only incidentally used and, therefore, the delivery of the end-product by the assessee to the customer constituted a 'sale' and not a 'works-contract'
This judgement was delivered on 17.02.2005.
In February 2008, another three judge Bench of the Supreme Court felt that the above decision needed consideration by a larger bench and so it came to be referred to a larger bench of five judges.
This larger bench delivered its marathon landmark judgement on 6th May, which we carried yesterday.
Here also there was a dissent:
Four judges subscribed to a majority judgement running into 66 paragraphs and about 16,000 words, while another judge gave a dissenting judgement running into 140 paras and 30,000 words.
What is the effect of all these wise words?
Majority of four judges held that "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 .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.
It was concluded that the decision rendered in Kone Elevators by the three-judge bench does not correctly lay down the law and it is, accordingly, overruled.
However in an elaborate dissent, one judge 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 Elevators by the three bench judge has been correctly decided.
So here is the simple arithmetic.In Kone Elevators-1, three judges held that the contract was a sale contract and not works contract.Now, in Kone Elevators-2 , four judges held that it was a works contract while one judge held that it was a Sales contract.
Now out of eight judges four hold it as works contract and four as sales contract. Isn't this equally balanced?
What then is the law? As of now it is going go be a works contract - and maybe for a long time to come!
It must be noted that this case was all about VAT - what about Central Excise/Service Tax?
Please see