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[Update] ELP acts & explains: Consti Bench 4-1 overrules Kone Elevator tax decision on sales / works contract distinction

A five-judge constitutional bench of CJI RM Lodha, AK Patnaik, Sudhansu Jyoti Mukhopadhaya, Dipak Misra and FM Ibrahim Kalifulla has overruled the Supreme Court's earlier Kone Elevators decision in a four-to-one majority against Kalifulla.

The majority opinion, written by Misra, ruled that the sale and installation of a lift was a "works contract" and not just a "contract for sale of goods" - under a sale of goods contract the entire sale consideration would attract sales or value added tax, while in a works contract no sales or value added tax would be charged on the "service element", i.e., the labour and other costs in installing the lift would be deducted and only the actual cost of the physical lift itself would be subject to the tax. [Judgment (PDF) 219 pages]

Economic Laws Practice (ELP) managing partner Rohan Shah together with Rohit Jain, Sonu Bhatnagar, Monish Panda, Tarun Jain, Somnath Shukla and Kshitz Karjee briefed senior counsel Harish Salve and Shyam Divan and acted for Otis Elevators Company (India) in the 35 petitions which were clubbed before the Supreme Court.

ELP wrote in an emailed statement:

The issue was already decided against the elevator companies by a 2005 decision of the Supreme Court in the case of Kone Elevators. However upon the request of the elevator manufacturers/installers the Supreme Court agreed to revisit the decision by constituting a larger bench of five judges to conclusively determine the issue. The Constitution Bench of the Supreme Court heard the writ petitions in great detail in the month of January, 2014. The significance of the matter lies in the following factors:

This is an important judgement by the Constitution Bench of the Hon'ble Supreme Court which distinguishes the earlier judgement passed in the case of Kone Elevators in 2005. It will impact all nature of ‘works contracts’ across the country and will help resolve a large quantum of pending litigation.    

It has been held that the said contract of erection and commissioning of lifts/ elevators are works contracts and after the 46th Constitutional Amendment VAT/ Sales Tax can be levied only on the goods component involved in execution of such contracts and not on the total value of the contract.     The judgment is of huge revenue significance to the elevator industry as the significant demand (along with interest and penalty) were raised by the State Tax Department on the entire contract value without allowing deduction of the service element on which Service Tax had already been paid to and collected by the Central Government, leading to dual taxation.    

The decision is also of importance to the industries generally in as much as the decision shall lay down the fundamentals as regards the determination of nature of a contract as works contract and consequently the liability of the elevator companies to Sales Tax under the State value added tax legislations under the Works Contract category.

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