Submitted By:

Submitted To:

Sagnik Das

Bipin Kumar

B.Sc. LL.B (Hons.)

Assistant Professor,

Roll No. 886

Faculty of Law.

Semester IV

National Law University, Jodhpur.

Case Comment: State of Andhra Pradesh v. M/S Kone Elevators.

TABLE OF CONTENTS

Case Comment: State of Andhra Pradesh v. M/S Kone Elevators...................................................2

Facts.............................................................................................................................................2
Contentions of the Parties............................................................................................................2
Judgment of the Court, Reasoning and Analysis.........................................................................3
Contract of Sale and Contract for Work..........................................................................................6
Deemed Sale- Constitutional Provisions.........................................................................................8
Deemed Sale and Taxation..............................................................................................................9

CASE COMMENT: STATE OF ANDHRA PRADESH V. M/S KONE ELEVATORS

Facts
M/s Kone Elevators (India) Ltd. [assessee] was a unit of M/s Kone Corporation, Finland who
manufactured Hi-tech New Generation Elevators. M/s Kone Corporation, Finland had its
operations spread over 37 countries in the world. The assessee being a registered dealer filed
monthly returns for the months of April and May. It was assessed by the Commercial Tax Officer
under the Andhra Pradesh General Sales Tax Act, 1957. The assessee claimed deductions of
labour charges for composition of tax under section 5G read with section 5F of the Act saying
that nature of the work undertaken by it constituted "works-contract" involving manufacture,
supply, installation and commissioning of elevators and lifts. The assessing authority however,
did not find weight in the assessees claims and did not allow for the deductions sought for. On
appeal by the assessee, the Deputy Commissioner, Secunderabad Division, Hyderabad confirmed
the assessment orders and treated the disputed turnover of the assessee as falling under Entry 82
to the First Schedule of the Act to which sales tax could be levied. Entry 82 related to electrical
or hydraulic lifts. This was objected to by the assessee who then filed before the Sales Tax
Appellate Tribunal, Hyderabad. The point which arose before the Tribunal was whether the
transactions related to works contract or contract of sale of lifts. The Tribunal ruled in favour
of the assessee by holding that the said transactions did not fall under contract of sale and
hence sales tax could not be levied on it. It held that the disputed turnover related to the
manufacture, supply, fabrication and erection involved in the works-contract. The original
assessing authority was accordingly directed to allow the deduction of labour charges and to
complete the assessment under section 5G read with section 5F of the 1957 Act, without treating
it under Entry 82 of the first schedule to the Act. The High Court upheld the Tribunals verdict
and hence the appeal was preferred to the Supreme Court.
Contentions of the Parties
The Appellants urged that the Legislature had classified the commodity "lift" under Entry 82 of
the first schedule to the Act keeping in mind that the "installation" was ancillary to the "sale" of
lifts. It was urged that the High Court had erred in holding that the installation of the lifts
involved skill and technical know-how, which was to be treated as works-contract. On the other

hand the assessee, M/S Kone Elevators submitted that they were engaged in the manufacture,
supply, erection, installation and commissioning of lifts by undertaking works-contract; that the
lifts/elevators as such could not be delivered to the customer; that various accessories and
components were required to be taken to the site where after carrying out the civil work, lifts
were installed and commissioned. It was further argued that only after all the parts stood
assembled at site, the lifts came into being; that installation and commissioning of lifts involved
skill and only after installation and commissioning of the lifts, the ownership stood transferred to
the customer. Consequently, the assessee was entitled for deduction of labour charges and was
entitled to composition of tax under section 5G of the said Act.
It was further submitted on behalf of the assessee that manufacture, supply, erection, installation
and commissioning of lifts came under definition of the words "works-contract" under section
2(1)(t) of the Act and, therefore, the tax leviable fell under section 5F of the Act. It was urged
that lifts and elevators could not be delivered like A/Cs as standard units; that manufacture,
supply, erection, installation and commissioning of lifts involved skill and labour as well as
technical know-how. To highlight on the level and amount of skill and know-how that was
required in supply and installation of lifts the assessee placed reliance on the Indian Standards
Institution's specifications and code of practice for installation of lifts and elevators.
Judgment of the Court, Reasoning and Analysis
The Court stated that it was well settled that there was no set-formula by which one could
distinguish a contract of sale from a works contract. The question was largely one of fact
depending upon the terms of the contract including the nature of the obligations to be discharged
thereunder and the surrounding facts and circumstances. If the intention was to transfer for a
price a chattel in which the transferee had no previous property, then the contract would be a
contract for sale. Ultimately, the true effect of an accretion made pursuant to a contract had 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 was the transfer of property and delivery of possession of the property,
whereas the main object in a "contract for work" was not the transfer of the property but it would
be one for work and labour.
Another test that the Court was: when and how the property of the dealer in such a transaction
passes to the customer: was it by transfer at the time of delivery of the finished article as a chattel
3

or by accession during the procession of work on fusion to the movable property of the
customer? If it were to be the former, it would be a sale; if it were the latter, it would a workscontract. Therefore, in judging whether the contract was for a sale or for work and labour, the
essence of the contract or the reality of the transaction as a whole must be taken into
consideration. The predominant object of the contract, the circumstances of the case and the
customs of the trade help in deciding whether transaction was a sale or a works- contract.
Essentially the question boiled down to the interpretation of the contract and the intention of the
parties to the contract. Thus the substance and not the form of the contract was material in
determining the nature of the transaction. There could thus be no definite rule to determine the
question as to whether a given contract was a contract of sale or works contract. The question
had to be determined on facts of each case and on proper construction of the terms and
conditions of the contract between the parties.
The Court then looked into the definition of sale under Section 2(1)(n) of the Act which
included every transfer of the property in goods (whether as such goods or in any other form in
pursuance of a contract or otherwise). These words were intended to include non-conventional
sale transactions as specified in Clause 29A of Article 366 of the Constitution, which was
introduced by the 46th Amendment. Before this amendment was introduced the expression sale
of goods occurring in Entry 48 of List II of the Government of India Act was interpreted by the
Supreme Court in State of Madras v. Gannon Dunkerly.1 The Court held that the essential
ingredients of a sale were an agreement to sell movables for a price, and property passing
therein pursuant to that agreement. It was held that in a building contract which was composite
and indivisible, there was no sale of goods as there could be no agreement to sell materials as
such and moreover, the property did not pass as movables. In order to enlarge the concept of sale
and to allow the State Legislatures the power to tax transactions simulating sales but not
conforming to the concept of sale under the Sale of Goods Act, the 46 th Constitutional
Amendment was passed and clause 29A was inserted in Article 366. Thus, the Andhra Pradesh
Legislature changed the definition of sale in line with the amendment so as to bring
transactions within the purview of sales tax, which would otherwise not be considered sale in
the strict sense of the term as per the law laid down in the Gannon Dunkerly case. Under the
1 AIR 1958 SC 560.

impugned Act, in order to constitute a sale a person who carried on the business of buying,
selling etc. and a sale in the course of business were the two requirements.
The Court cited the case of Hindustan Shipyard v. State of Andhra Pradesh2 and stated that if the
thing to be delivered had any individual existence before the delivery as the sole property of the
party who was to deliver it, then it would be a sale. If the bulk of material used in construction
belonged to the manufacturer who sold the end- product for a price, then it would be a strong
reason to believe that the contract was in substance one for the sale of goods and not one for
labour. However this was not a decisive or clinching test. Apart from the bulk of the material the
relative importance of the material and the work, skill and labour of the party also had to be
taken into account. If the skill and labour were 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 was to avail the skill and labour of the seller then even though some material or
components may incidentally have been 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.
In the facts of the present case, it was agreed between the parties that the customer would
approve the drawings and would approve the drawings and make machine room for the power
supply in order to commence installation of the lift by the assessee. The contractual obligations
of the assessee regarding installation included employing labour to complete the mechanical
erection, electrical wiring testing and commissioning of the lift. The assessee had agreed that the
installation would commence only after the lifts had arrived at the site and upon intimation from
the customer that the site was ready as per the drawings. As soon as the lift was to be installed,
the customer was to take over. Also any material supplied by the assessee would remain their
property till the lift was handed over to the customer. The contract in question also consisted of
certain obligations on the part of the customers under which the customer was to undertake the
work of civil constructions relating to the installation of the lift. There were other obligations that
the customer had to undertake under the contract as per the delivery schedule.

2 (2001) 119 STC 533.

Having examined the provisions of the contract the Court concluded that the customer was
required to do the actual work at the site for installation of the lift. Thus the onus of preparation
of the site and making it ready for installation of the lift was on the customer. The assessee would
undertake installation only if the site was made ready by the customer. Also under the contract
the assessee reserved the right to charge the customer for delays in providing these facilities.
Thus the contract was divided into two parts: the work to be initially done in accordance with
the specifications laid down by the assessee, this was to be done by the customer and the
supply of the lift which was to be done by the assessee. The work part was clearly assigned to
the customer as a part of the contract and the supply part was to be performed by the assessee.
Therefore, contractual obligation of the assessee was only to supply and install the lift, while the
customer's obligation was to undertake the word connected in keeping the site ready for
installation. Thus on an analysis of the contract, it was clear that the contract was one of sale and
not for services or work, and that any work involved was only incidental to the main
transaction, which was a transaction for sale. Moreover, the assessee company was clearly in the
business of manufacturing and supplying lifts and hence the second element of the provisions
requirements was also satisfied. Therefore, the delivery of the end-product by the assessee to the
customer constituted a "sale" and not a "works- contract". It was thus a sale under Entry 82 of the
first schedule to the Act.

CONTRACT OF SALE AND CONTRACT FOR WORK

There has been extensive literature and jurisprudence on the distinction between contract of sale
and contract for works. The distinguishing line between the two is often very thin in practice and
cannot be easily made out. The Supreme Court in Commissioner of Sales Tax Madhya Pradesh v.
Purshottam Premji3 had considered the distinction between the two. It held that the primary
difference between a contract for sale and a contract for works is that in the former there is no
involvement of property. It may so happen that the person performing work or rendering services
used a part or even the whole of materials as his property. But the thing produced as a whole has
individual existence as the sole property at a time before delivery and the party who produced it,
and the property passes therein only under the contract in goods relating to the performance of
the contract is not sufficient to constitute a sale. In order to constitute a sale, there must be an
3 [1970] 2 STC 287.

implied or express agreement relating to the sale of goods and completion of the agreement by
the passing of title in the goods to be sold under the contract. Ultimately, this distinction has to
be made on judging the true effect of the transaction, the element of usage of skill and know-how
of the person by the customer, and the ascertainment of the true intention of the parties from the
respective facts and circumstances of the case. Mere passing of property in an article or
commodity during the course of performance of the transaction in question does not render the
transaction automatically to be a transaction of sale. Even in a contract for services, it is possible
that articles or materials may have been used by the person executing the work and property in
such materials may pass to the other party, the consumer. But this will remain as a contract for
works and will not amount to contract for sale. In every case the Court must determine what the
intention of the parties as and what was the primary object of the transaction. In some cases,
there might be separate agreements forming part of the same transaction where one agreement is
for sale and the other is for contract of services. In that event the transaction would not be one
and indivisible but would be severable into contract of service and the contract of sale.
Generally when a contract is made to make a chattel and deliver it, it is a contract of sale, but that
is not always the case. The test would be whether the thing to be delivered has any individual
existence before delivery as the sole property of the party who is to deliver it. 4 Some examples
mentioned in Pollock and Mulla5 are:
1) A promises to make a set of false teeth for B with materials wholly found by A and B
promises to pay for them when made. This is a contract for the sale of goods.6
2) A orders a jacket from B. After inspecting several skins, he chooses a colour and selects a
style for the jacket. The price is also agreed. This is a contract for the sale of goods.7

4 Union of India v. CI Manufacturing Co. AIR 1977 SC 1537, 1542.

5 POLLOCK & MULLA, THE SALE OF GOODS ACT 72 (8th ed. 2010).
6 Barreto v. Pruce AIR 1939 Nag 19.
7 Marcel Furriers Ltd v. Tapper [1953] 1 All ER 15.

3) A promises to carve a block of marble belonging to B into a statue. This is not a contract
of sale.
4) A promises to print and deliver to B five hundred copies of a manuscript which B
entrusted to him for that purpose, on paper and with ink furnished by A. This is a contract
for work and not for the sale of goods.8
5) A carries on business as a photographer and sells the photographs to his customers. This
is a sale of goods.9
In cases where there is no sale, there is never a time when the thing produced is as a whole the
makers absolute property, even though all the materials may have been his property. Although
the contract may be a contract to do work and not an order for a specific article, yet the property
in the article produced may pass to the party giving the order.
The question whether a contract of sale or work often crops up in the proceedings for assessment
under the sales tax laws for deciding whether the transaction was eligible to tax. 10 The above case
also dealt with such a scenario. One of the important tests in such cases 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. But where a contract is primarily a contract for work and the labour and materials are
supplied in execution of such contract, there is no contract for sale of the materials, but it is a
work contract. The fact that it is only by doing work and labour on the materials that they acquire
commercial identity is prima facie indicative of a work contract.
In the present case, the Court makes a distinction between contract of sale and work contract
based on what the essence of the contract was in the present facts and circumstances. It judged
the reliance of the consumer on the skill and technical know-how of the assessee. The Court
found that it is not the bulk of material alone but the relative importance of the material as
regards the skill and labour of the assessee. The Court noted that under the contract, the
8 Clay v. Yates (1856) 1 H&N 73.
9 Ghosh v. State of Bihar (1961) Pat 272.
10 POLLOCK & MULLA, THE SALE OF GOODS ACT 74 (8th ed. 2010).

arrangements before installation of the lift was to be made by the customer and hence any skill
and labour on the part of the assessee was only incidental to the main transaction, which was one
of sale.

DEEMED SALE- CONSTITUTIONAL PROVISIONS

In the case of State of Madras v. Gannon Dunkerly11 the Supreme Court held that the expression
sale of goods as used in the entries in the Seventh Schedule to the Constitution of India had the
same meaning as within the Sale of Goods Act. It held that in order to be subject to the levy of
sales tax, a transaction should have the following ingredients, namely, parties competent to
contract, mutual assent, and transfer of property in goods from one of the parties to the contract
to the other party thereto for a price. This decision was followed in State of Punjab v. Associated
Hotels of India Ltd.12 and AV Meiyappan v. CIT.13 This position led to the avoidance of tax in
various ways and eventually the Law Commission of India in a report in 1974 recommended a
Constitutional amendment, which led to the 46th Constitutional Amendment of 1982 and the
insertion of clause 29-A in Article 366 of the Constitution. Each of the sub-clauses of Article 366
(29-A) serve to bring transactions where one or more of the essential ingredients of a sale as
defined in the Sale of Goods Act are absent, within the ambit of purchase and sale for the
purposes of levy of sales tax.14 However Gannon Dunkerly still holds the field in some respects
considering that excepting the categories given in Article 366, the meaning of sales remains
unaltered. Thus for all the other transactions which are not provided within the ambit of clause
29-A, it would have to conform to the meaning of sales as within the Sale of Goods Act for the

11 AIR 1958 SC 560.

12 (1972) 1 SCC 472.
13 (1967) 20 STC 115 (Mad).
14 POLLOCK & MULLA, THE SALE OF GOODS ACT 91 (8th ed. 2011).

purpose of levying sales tax.15 In BSNL v. Union of India16 the Supreme Court held that after the
46th Amendment, those contracts covered by clause 29-A are subject to sales tax by the respective
States, which falls under Entry 54 of List II. In such cases the tests for deciding whether a
contract is for sale or not will not apply. Thus the case of Rainbow Colour Lab v. State of
Madhya Pradesh17 is not good law. Also it held that this observation in Associated Cements v.
Commissioner of Customs18 in not obiter and is binding.
In the present case as well, in view of the amendment, the Uttar Pradesh Legislature had
amended the definition of sale in their sales tax legislation. This was also done by other States
such as Tamil Nadu and West Bengal.19

DEEMED SALE AND TAXATION

A recent Kerala High Court judgment20 notes that under VAT law there is no distinction between
sales and deemed sales in terms of levy of tax. In fact, the tax rate applicable for deemed sales of
a movable asset is equivalent to the tax rate applicable for the sales of the very asset. This
decision also affirms that only VAT can be levied on deemed sales. Though the High Court has
not decided the constitutional validity of the levy of service tax on deemed sales transactions, it

15 Bharat Sanchar Nigam Ltd v. Union of India (2006) 3 SCC 1, 43.

16 Id.
17 (2000) 2 SCC 385.
18(2001) 4 SCC 593.
19 Sunrise Associates v. Govt. of NCT of Delhi.
20

2012-TIOL-1032-HC-KERALA-VAT

available

<http://www.taxindiaonline.com/RC2/subCatDesc.php3?
subCatDisp_Id=51&filename=legal/hc/2012/2012-TIOL-1032-HC-KERALA-VAT.htm>

10

at

is very clear that this decision does have a lot of persuasive impact on the service tax law
concerning the levy of service tax on deemed sales transactions.
As already stated, the definition of sale in sales taxing statutes was the same as used in the Sale
of Goods Act, till the time of the 46 th Amendment. The validity of the Forty-sixth amendment of
the Constitution came directly before the Supreme Court in Builders Association of India v.
Union

of

India21

because,

on

the

passing

of

the

Forty-sixth amendment the State Governments commenced provisions contained in the proviso
to article 368(2) of the Constitution in that resolutions had been passed by the Legislatures of 12
states. It was held that the object of the Forty-sixth Amendment was to convert what is not
a sale into a sale. Originally, a transfer of property in goods involved in the execution of works
contract was held to be not a sale. Such a sale is now deemed by fiction of law to be a sale and is
made taxable. In no other respect does the Forty-sixth amendment enlarge the power of the State
to levy sales tax. It was in order to overcome the effect of Gannon Dunkerly that the Parliament
amended article 366 by introducing sub-clause (b) of clause (29-A). Sub-clause (b) of clause (29A) states that 'tax on the sale or purchase of goods' includes amoung 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. It does not say that a tax on the sale or purchase of goods included
a tax on the amount paid for the execution of a works contract. It refers to a tax on the transfer of
property in goods (whether as goods or in some other form) involved in the execution of a work
contract.22 While referring to the transfer, delivery or supply of any goods that takes place as per
sub-clauses (a) to (f) of clause (29-A), the latter part of clause (29-A) says that '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 and a purchase of those goods by the person to whom such
transfer, deliver or supply is made. Hence, a transfer of property in goods under sub-clause (b) of
clause (29-A) is deemed to be a sale of goods involved in the execution of works contract by the
person making the transfer and a purchase of those goods by the person to whom such transfer is
21 1989 SCALE (2)768.
22 Builders Association Of India v. State Of Karnataka (1990) 79 STC 442 (Kar).

11

made.23 The object of the new definition introduced in clause (29-A) of article 366 of the
Constitution was, 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. 24 The
provisions of Sales Tax Acts of various States and their relation with deemed sales was also
considered by the Supreme Court in the case of 20th Century Finance Corporation v. State of
Maharashtra.25 The dominant object in a contract is held to be not relevant and the value of the
goods involved in a contract is held liable to tax under Article 366 (29A) of the Constitution of
India.26
A question came up for consideration before the Supreme Court in the case of builders, that if the
land is provided by the land owners to the builders for the construction of the flats and the
builders constructs the flats after the allotment and taking the money in installments, the Apex
Court held that such contract would be works contract and the value of the goods would be liable
to tax in the case of K. Raheja Development Corporation vs. State of Karnataka.27 The
appropriate legislature by creating legal fiction can fix site of sale. The States however, in
exercise of power under Entry 54 of List II read with Article 366 (29-A) (d) are not competent to
levy sales tax on the transfer of right to use goods, which is deemed sale, if such sale takes place
outside the State or is a sale in the course of inter-State trade or Commerce or is a sale in the
course of import or export.28

23 Binani Industries Limited v. Assistant Commissioner (2003) 129 STC 199 (Kar).
24 Id.
25 2000 UPTC 593.
26 Bharat Sanchar Nigam Limited v. Union of India (2006) 3 SCC 1.
27 (2005) 5 SCC 162.

12

Actual delivery of the goods is not necessary for effecting the transfer of the right to use the
goods but the goods must be available at the time of transfer must be deliverable and delivered at
some state. It is assumed at the time of execution of any agreement to transfer the right to use
that the goods are available and deliverable. If the goods or what is claimed to be goods by the
respondents are not deliverable at all by the service providers to the subscribers the question of
the right to use those goods would not arise.29 Thus for being a transfer of right to use the goods
the goods must be deliverable and should be delivered at some stage thus delivery of the goods at
some stage is a condition precedent for the transfer of right to use the goods.30
The Supreme Court has also allowed the States to come out with an alternative method to levy
Sales Tax on Works contract, if to arrive at material value is difficult. The states have come out
with a alternative method called as Composition Tax method to tax the indivisible works
contract, which is a non-legal /alternative method. The small percentage like 1%, 2%, 4%, 8% as
Composition Tax is levied but on the total contract price without any deduction which is
available in the legal options under the State Sales Tax / VAT Acts. After, the said amendment to
the Constitution certain States a namely Maharashtra & Delhi have come out with separate
`Works Contract Acts. The other states incorporated the separate provision to levy Sales Tax on
the deemed sales in the works contracts. Under the State Sales Tax Acts or separate Works
Contract Acts, No contractor or contractee were entitled to claim any set off of Sales Tax paid to
their vendors. There was a double taxation in the hands of contractors in the Sales Tax Regime
otherwise.31

28 Supra n.25.
29 Justice Rajes Kumar, Speech Delivered in the Seminar Session of 27 th U. P. Tax Bar
Conference, Faizabad, 6th January 2007.
30 Media Communications v. Govt. of Andhra Pradesh (1997) 105 STC 227 AP.
31 Dhampur Sugar Mills Ltd v. Commissioner of Trade Tax (2006) 5 SCC 624.

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