Case Law Details
Supply and Installation of Lifts is a Works Contract ; SC explains distinction between contract for sale of goods and works contract
The Constitution bench of the Supreme Court in the case of M/S. Kone Elevator India Pvt. Ltd. vs. State of Tamil Nadu and Ors. (Writ Petition (C) No. 232 OF 2005) vide its order dated 6.5.2014 has overruled the decision of the three-Judge bench in the case of State of A.P. v. Kone Elevators (India) Ltd, reported at (2005) 3 SCC 389.
Honourable SC held that that four concepts have emerged from various SC judgments. 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.
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.
SC held that 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 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.
Posted by CA Sandeep Kanoi
Author Bio
defiantly this decision will not serve any purpose for assessee. Rather this decision will only help revenue departments in creating problems for assessee. The three important issue are still not resolved.
1. if contract is entered for supply and installation then for interstate goods who took delivery will not matter,
2. IF goods are moved from one state to another and used in same form for execution of works contract then state where goods has been installed cannot impose tax on that good
3. IF goods are moved from one state to another even against pre-existing contract then also it will fall under section 6(2) of CST act
This decision created more confusion regards works contracts.There should be vide defination or works contract needed for clear vision towards it.
15-05-2014
Distinction is o.k. But what purpose it serves? Ownership is transferred and the supplier will have continued obligation for its performance.
I am not sure about the intention behind such distinction.