Facts
Decision
Comment


Facts

Otis is a leading manufacturer and service provider of elevators, escalators and moving walkways in India. Otis entered into comprehensive contracts with its customers for the supply of elevator components and parts and the commissioning and installation of the elevators.

Otis treated these contracts as works contracts. Accordingly, Otis paid sales tax and value-added tax (VAT) on the goods involved in executing the contracts, and paid service tax for services rendered for the commissioning, building and installation of the elevators.

However, various state tax departments in the assessment proceedings treated such contracts as sales contracts and consequently levied VAT on the entire value of each contract, without deducting for the value of the services. Otis challenged the assessment orders by approaching the Supreme Court under Article 32 of the Constitution. Several other elevator companies filed similar writ petitions.

Decision

On May 6 2014 the Supreme Court announced its long-awaited judgment(1) allowing, among other things, the writ petitions filed by Otis and the other elevator companies. It held that the contracts for the supply of elevator components and parts and the commissioning, building and installation of the elevators were works contracts, not sales contracts.

Comment

The Supreme Court had already ruled against the other elevator companies in 2005 in Kone Elevators.(2) However, on the request of the elevator manufacturers and installers, the Supreme Court agreed to revisit the decision by constituting a larger bench of five judges to determine conclusively the issue. In January 2014 the Constitution Bench of the Supreme Court heard the writ petitions.

The latest decision has distinguished the earlier Kone Elevators judgment, and will affect works contracts across the country and help to resolve a significant amount of pending litigation.

The Constitutional Bench held that contracts for the supply of elevator components and parts and the commissioning, building and installation of the elevators are works contracts and, according to the 46th Constitutional Amendment, VAT and sales tax can be levied only on the goods component of such contracts, and not on the total value of the contracts.

The judgment also affects the elevator industry financially, as the taxes levied by the state tax departments led to dual taxation. This is because the taxes were based on the entire contract value, without deducting for the service value on which the companies had already paid service tax to the central government.

The decision has also established the fundamentals for determining whether a contract is a works contract. In doing so, it established the elevator companies' liability to sales tax under the works contract category within the state VAT legislation.

For further information on this topic please contact Ranjeet Mahtani or Divya Jeswant at Economic Laws Practice by telephone (+91 22 6636 7000), fax (+91 22 6636 7172) or email (ranjeetmahtani@elp-in.com or divyajeswant@elp-in.com).

Endnotes

(1) Kone Elevators (India) Pvt Ltd v State of Tamil Nadu 2014-TIOL-57-SC-CT-LB.

(2) State of AP v Kone Elevators (India) Pvt Ltd 2005 (181) ELT 156 (SC).