STATE OF ANDHRA PRADESH versus M/S. KONE ELEVATORS (INDIA) LTD.

Citation: [2005] 2 S.C.R. 152 · Decided: 17-02-2005 · Supreme Court of India · Bench: S.N. VARIAVA · Disposal: Appeal(s) allowed

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Judgment (excerpt)

A 
STATE OF ANDHRA PRADESH 
v. 
MIS. KONE ELEV A TORS (INDrA) LTD. 
FEBRUARY 17, 2005 
B 
[S.N. VARIAVA, DR. AR. LAKSHMANAN AND S.H. KAPADIA, JJ.] 
Andhra Pradesh General Sales Tax Act, 1957; Ss. 2(l)(n) & (t), 5F and 
5G, Entry 82 of the First Schedule to the Act : 
C 
Contract for sale and installation of lifts between assessee/seller and 
customer-levy of sales tax-Deductions towards labour charges-Claim of 
-Held: Claim of the deductions depends upon the terms/nature of contract-
True effect of an accretion made pursuant to a contract could be judged from 
the intention of the parties-Transfer of Property and delivery of possession 
D is the essence of contract for sale but the essence of contract for works is work 
and labour-Thus, it is substance and not the form of the contract which is 
material in determining the nature of a contract-Onus of preparation and 
making the site ready for installation of lift is on customer but major component 
of the end product supplied by the assessee-Hence, the contract in question 
is contract for sale and not a works contract-Section 5G of the Act not 
E attracted-Deductions of labour charges not allowed 
The questions which arose for determination in this appeal were as 
to whether contracts entered into and executed by the assessee, 
manufacturer of lifts and elevators, were contracts for sale or works 
F contract and to determine assessee's claim of deductions of labour charges 
under Section 5G of the Andhra Pradesh Sales Tax Act. 
It was contended by the appellant-State that the main object of the 
contract in question was selling of the lifts and installation work was only 
incidental to the main contract; and that the High Court erred in holding 
G that the installation of the lift involved skill and technical know-how and 
thus could appropriately be treated as works-contract. 
Respondent-company submitted that they were engaged in the 
manufacture, supply, erection, installation and commissioning of lifts by 
undertaking works-contract; that installation and commissioning of lifts 
II 
152 
STATE v. KONE ELEVATORS (INDIA) LTD. 
153 
involved skill and only after installation and commissioning of the lifts, 
the ownership in the lifts is transferred to the customer. The assessee 
became entitled for deduction of labour charges from sales tax in terms 
of Section 5G of the Act; and that since contract in question satisfies 
requirements of works-contract, Section 5F of the Act is attracted. 
Allowing the appeal, the Court 
HELD : 1.1. 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 
A 
' 
B 
the nature of the obligations to be discharged thereunder and the 
surrounding circumstances. The true effect of an accretion made pursuant C 
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. (157-D-E-F] 
D 
1.2. It is settled law 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 contract 
is a contract for sale of goods or is a works-contract. Ultimately, the terms 
of a contract would be determinative of the nature of the transaction/ E 
contract. (157-H; 158-A-BI 
2.1. The Andhra Pradesh General Sales Tax Act ordains that transfer 
of property in goods for valuable consideration must be "in the course of 
trade or business". This is because the incidence of tax falls on a dealer 
who "carries on the business of buying, selling, supplying or distributing 
goods". A sale by a person who carries on the business of buying, selling 
etc. and a sale in the course of business are the twin requirements to attract 
the charge of tax under the Act. f 159-G-H) 
F 
State of Madras v. Gannon Dunkerley & Co. (Madras) ltd, AIR (1958) G 
SC 560, referred to. 
2.2. 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 in determining the nature of the contract. If the 
major component of the end-product is the material consum

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