SC makes ‘works contracts’ less taxing

May 28 2014, 04:47 IST
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SummaryIn a judgment that clears the air over the tax liability on installation and commissioning of lifts/elevators

In a judgment that clears the air over the tax liability on installation and commissioning of lifts/elevators, a five-judge constitutional bench of the Supreme Court, in a 4:1 majority decision, has held that the sale and installation of a lift is a “works contract”, thus no sales or value-added tax (VAT) would be charged on the service element.

This means that the labour and other costs including service element in installing a lift would be excluded from the total consideration received and sales tax/VAT would be charged only on the goods component (the lift only) involved in execution of such a contract.

Legal experts feel the ruling will have far-reaching consequences in indirect taxes and will impact all nature of ‘work contracts’ across sectors, including real estate, infrastructure and many sectors where work contracts take place.

Overturning its earlier 2005 decision in the Kone Elevators case which ruled otherwise, the top court said installation of lifts is not a “contract for sale of goods”, a stand taken by various state governments. Under a sale of goods contract, the entire sale consideration would attract sales or value-added tax as per enactments of the state legislatures.

“…if there are two contracts, namely, purchase of the components of the lift from a dealer, it would be a contract for sale and similarly, if separate contract is entered into for installation, that would be a contract for labour and service. But, a pregnant one, once there is a composite contract for supply and installation, it has to be treated as a works contract, for it is not a sale of goods/chattel simpliciter. It is not chattel sold as chattel or, for that matter, a chattel being attached to another chattel. Therefore, it would not be appropriate to term it as a contract for sale on the bedrock that the components are brought to the site, i.e. building, and prepared for delivery. 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,” the Supreme Court explained.

The judgment has huge tax implications to the elevator industry as the state governments were levying sales tax/VAT on the entire

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