What was the main legal question in Kone Elevator?

Whether the elevator supply and installation contract was a sale of goods or a works contract involving work and labour.

How do courts distinguish sale from works contract?

If property passes on delivery as a finished chattel, it is a sale. If property passes by gradual accession during installation, it is a works contract.

What did the Court finally hold?

On the given facts, the arrangement was held to be a contract of sale, not a works contract.

Why does the classification matter?

Tax treatment and deductions differ. Works contracts may allow labour deductions or composition, while sales are taxed on the sale price.

What is the practical test for mixed contracts?

Look at the essence of the deal—what is the dominant intention and when does property pass to the customer.

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

CASE_TITLE: Kone Elevator India Pvt Ltd v. State of Tamil Nadu & Ors PRIMARY_KEYWORDS: works contract vs sale; elevator installation; transfer of property SECONDARY_KEYWORDS: APGST Act 1957; composition; labour deductions; installation contracts PUBLISH_DATE: 25-10-2025 AUTHOR_NAME: Gulzar Hashmi LOCATION: India slug: kone-elevator-india-pvt-ltd-v-state-of-tamil-nadu-and-ors

Quick Summary

This case asks a simple but powerful question: when a company supplies and installs an elevator, is it selling a finished product, or is it doing a work-and-labour job?

The Court looked at the essence of the deal. If the property in goods passes on delivery of a finished item, it is a sale. If it passes bit by bit while fixing it at site, it is a works contract. On the facts here, the Court treated the arrangement as a sale.

Issues

Whether the contracts for manufacture, supply, installation, and commissioning of elevators were works contracts or sale contracts for tax purposes.

Rules (Tests)

Contract of Sale

Main object: transfer of property in goods and delivery of possession as a finished item.

Contract for Work

Main object: work and labour; property passes by accession during installation/fusion at site.

Essence Test: Judge the reality of the whole transaction, not labels in the contract.

Facts (Timeline)

Parties: Department (State of Andhra Pradesh) vs Assessee (dealer for M/s Kone Corporation, Finland) within Secunderabad jurisdiction.

Agreement: Supply and install a Kone Elevator for ₹3,30,000. Customer to approve drawings and ready the site.

Delivery Condition: Kone to deliver only after customer confirms the site is ready as per drawings.

Apr–May 1995: Assessee filed monthly returns; provisional assessments made for 1 Apr–30 Jun 1995 and 1 Jul–31 Aug 1995 under APGST Act, 1957.

Claim: Assessee sought labour deductions/composition under Sections 5G read with 5F, saying it was a works contract.

9 Oct 1995: Deputy Commissioner dismissed assessee’s appeals; turnover treated under Entry 82 of First Schedule.

22 Dec 1995: Sales Tax Appellate Tribunal allowed assessee’s appeals—held as works contract.

2 Jul 1999: High Court dismissed Department’s revision; matter reached the Supreme Court in civil appeal.

Arguments

Appellant (Department)

The dominant object was sale of a lift system.
Installation was incidental to delivering a finished product.
Therefore, tax as sale; no labour deduction/composition as works contract.

Respondent (Assessee)

Contract covered manufacture + supply + installation + commissioning.
Property passed by accession during fixing at site.
Hence, it was a works contract eligible for deductions/composition.

Judgment (Held)

The Court held that, on these facts, the arrangement was a contract of sale, not a works contract. The property in the elevator system was viewed as passing on delivery of a finished item, with installation treated as an adjunct to sale.

Ratio (Reasoning)

The dominant intention was to transfer a finished elevator system.
Passing of property aligned with delivery of the chattel; installation was secondary.
Applying the essence test, the transaction matched a sale more than a works contract.

Why It Matters

Labeling a mixed contract as sale or works contract changes tax base, rate, and eligibility for labour deductions/composition. For industries like elevators, HVAC, and fit-outs, the dominant intention + property-passing test decides how tax is computed.

Key Takeaways

Dominant object of the contract governs classification.
Ask when and how the property passes to the customer.
Delivery as a finished chattel → Sale; Accession during fixing → Works contract.
Installation may be incidental and not change a sale into a works contract.

Mnemonic + 3-Step Hook

Mnemonic: “DELIVER vs FIX”

DELIVER a finished item → Sale.
FIX into the site piece by piece → Works contract.

3-Step Hook

Essence: What is the deal really for?
Property: When does it pass—delivery or accession?
Label check: Ignore titles; read substance.

IRAC Outline

Issue	Rule	Application	Conclusion
Is elevator supply + installation a sale or works contract?	Essence test; property passing test (delivery vs accession).	Finished elevator delivered; installation viewed as incidental to sale.	Classified as sale; works contract benefits not applicable.

Glossary

Works Contract: A contract where the main object is work and labour; property passes during execution at site.
Sale of Goods: Transfer of property in goods for a price, usually on delivery of a finished item.
Accession: Goods become part of the immovable/movable property while being fixed or installed.
Composition Scheme: A simplified tax payment mechanism often available for works contracts, with limits and conditions.