Contract Law

Kone Elevator India Pvt. Ltd. v. State of Tamil Nadu

(2014) 7 SCC 1

Facts

Kone Elevator entered into contracts for the manufacture, supply, installation, testing and commissioning of lifts.
Lift components were manufactured or procured and then assembled and installed at customers’ buildings.
The installed lift became integrated with the building and could not function as a complete lift before installation.
State tax authorities treated the transaction as a sale of a finished lift and sought sales tax accordingly.
Kone argued that the transaction was an indivisible works contract involving:
specialised design;
labour;
installation;
transfer of materials during execution.
An earlier Supreme Court decision had characterised a lift contract largely as a sale.
The matter was referred to a larger Bench for reconsideration.

Whether a composite contract for supply and installation of a lift is a contract of sale or a works contract.
Whether the “dominant intention” test remained decisive after the constitutional expansion of works-contract taxation.

A works contract may involve both:
transfer of property in goods; and
labour or services.
After Article 366(29A)(b), the transfer of goods involved in execution of a works contract can be taxed separately.
It is no longer necessary for the transaction’s dominant purpose to be transfer of goods before its material component can be taxed.
The transaction must be examined in substance, including:
whether the final product comes into existence only through installation;
whether materials become part of immovable property;
the composite and indivisible nature of the obligations.

A lift is not simply delivered as an ordinary finished chattel.
Its manufacture and functioning depend on the dimensions, structure and requirements of a particular building.
Components must be assembled, fitted and integrated into the premises.
The final operational lift comes into existence only after considerable work and installation.
Once installed, it becomes a permanent part of the building.
The customer therefore contracts not merely to buy movable components, but to obtain a completed installed system.
The Court held that separating “supply” from “installation” in form could not change the true nature of the composite transaction.
The materials transferred to the customer during execution could still be taxed under the constitutional works-contract framework.
The larger Bench overruled the earlier restrictive characterisation and rejected sole reliance on the dominant-intention test.
The substance of the transaction showed a works contract combining goods and services.

The Supreme Court held that manufacture, supply and installation of a lift constitutes a works contract.
The goods component may be taxed, but the entire transaction cannot be treated as a simple sale of a lift.
Use this case for: a lift-installation contract is a composite works contract because the completed lift emerges through integration of goods and labour into the building.