IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY TUESDAY, THE 21ST JUNE 2011 / 31ST JYAISHTA 1933 OT.Rev.No. 85 of 2010() ----------------------- TA.VAT.159/2009 of KERALA VAT APPELLATE TRIBUNAL, ERNAKULAM ................... REVISION PETITIONER/APPELLANT ------------------------------------------------- M/S.A1 STEEL INDUSTRIALS, JONAKAPURAM, KOLLAM, REPRESENTED BY ITS MANAGING PARTNER, A.K. HAFEEZ BY ADV. SRI.N.MURALEEDHARAN NAIR SMT.K.HYMAVATHY RESPONDENT(S): RESPONDENT ------------------------- STATE OF KERALA THIS OTHER TAX REVISION (VAT) HAVING BEEN FINALLY HEARD ON 21/06/2011, THE COURT ON THE SAME DAY PASSED THE FOLLOWING: APPENDIX ANNEXURE-A – TRUE COPY OF THE ASSESSMENT ORDER ALONG WITH RECTIFIED ORDER PASSED BY COMMERCIAL TAX OFFICER (AA), O/o THE ASST.COMMISSIONER OF COMMERCIAL TAXES, KOLLAM FOR THE YEAR 2005-06 DATED 11.9.2007 & 18.10.2007. ANNEXURE B- TRUE COPY OF THE APPELLATE ORDER PASSED BY DEPUTY COMMISSIONER (APPEALS)-II, COMMERCIAL TAXES, KOLLAM DATED 13.01.2009. ANNEXURE-C- TRUE COPY OF THE TRIBUNAL ORDER IN T.A. VAT NO.159/2009 FOR THE YEAR 2005-06 DATED 31.8.2010. ANNEXURE D- TRUE COPY OF THE ASSESSMENT ORDER FOR THE YEAR 2003-04 PASSED BY ASST.COMMISSIONER (ASSMT.), SPECIAL CIRCLE, KOLLAM DATED 14.6.2005. ANNEXURE E- TRUE COPY OF THE CERTIFICATE DATED 27.4.2009. ANNEXURE F- TRUE COPY OF THE MODIFIED ORDER PASSED BY ASST.COMMISSIONER-II, COMMERCIAL TAXES, SPECIAL CIRCLE, KOLLAM FOR THE YEAR 2005-06 DATED 25.10.2010. “CR” C.N.Ramachandran Nair & Bhabani Prasad Ray, JJ. ==================================== O.T.Revn.85 of 2010 ==================================== Dated this the 21st day of June, 2011. ORDER Ramachandran Nair, J. The sole question raised for our decision in this case is whether galvanizing done by the petitioner on cross arms, stay rods etc. supplied by the Kerala State Electricity Board attract sales tax under the Kerala Value Added Tax Act, hereinafter called “the Act”. All the statutory authorities including the Tribunal held that galvanizing is a “works contract” involving transfer of goods from petitioner to KSEB attracting liability under the provisions of the Act and Rules. Since petitioner did not choose to produce break up details of cost of labour and cost of materials involved, assessment was made by deducting 25% from the gross amount towards labour charges as provided under the Rules and the balance 75% of the amount received by the petitioner for the galvanizing work from the KSEB O.T.Revn.85 of 2010 -:2:- was assessed. It is against this order of the Tribunal confirming the assessment, petitioner has filed this revision case before us. We have heard counsel for the petitioner and Government Pleader for the State. 2. Before proceeding to consider the legal issues raised, we have to consider the nature and scope of the work of galvanizing which is nothing but zinc coating on iron and steel items to prevent corrosion through rusting. The items, the galvanizing of which led to this case, are cross arms used by the Electricity Board for attaching on electric posts for drawing electric lines through the same. Similarly, galvanised stay rods are firmly fixed on the ground to tie the stay wire drawn from the electric post to stabilize the electric post. Galvanizing is done to prevent corrosion and destruction to these items remaining exposed in the air. The work entrusted by the KSEB to the petitioner was for the year 2005-06. Payment made by KSEB for galvanization to the petitioner was at the rate of Rs.12.10 per kilogram of iron-item galvanized. It is common knowledge that cost of iron rod per kilogram during 2005-06 ranged from Rs.35 to 40 and the value addition of the same after galvanization is 25 to 30% of the cost of iron item galvanized. In other words, galvanization substantially improves the quality of iron rods galvanized and the same O.T.Revn.85 of 2010 -:3:- will protect the item from any kind of corrosion which would otherwise be mainly on account of rusting. Admittedly, galvanization is nothing but coating of zinc on the iron and zinc is a very expensive metal. Therefore, the cost of the galvanising is mainly attributable to the value of zinc used. Keeping this in mind, we proceed to consider the contentions of the petitioner relating to statutory provisions. Petitioner does not dispute the fact that the transaction is a works contract within the meaning of Section 2(lv) of the Act which includes contract for processing of goods and galvanization therefore falls within the definition of “works contract”. However, petitioner's case is that improvement or processing done is a pure labour contract which does not attract any tax liability. So far as the materials used in the galvanization process are concerned, petitioner's case is that those are only consumables. In the galvanizing process, iron rods or cross arms to be coated are first cleaned by using sulphuric acid to remove rust completely. Thereafter, the rod or cross arm or whatever is the item required to be galvanized is dipped in molten zinc to make a coating to the level of agreed thickness in microns required by the KSEB. Fuel used for melting zinc is said to be furnace oil. Petitioner's contention that all items used in galvanizing are consumables is thoroughly O.T.Revn.85 of 2010 -:4:- unacceptable because, in the course of galvanizing, the iron items supplied by KSEB are coated with zinc leading to even change in the physical identity of the item galvanized. No one can dispute the fact that galvanized iron items are different from pure iron items because, while galvanization gives protection for long duration, the items used without galvanization will corrode leading to complete destruction in the course of time. As already stated, the contract itself indicates that the rate paid to the petitioner by KSEB for galvanization is at the rate of 12.10 per kilogram of the items galvanized. The consumables involved are only cleaning material, namely sulphuric acid and certainly the fuel used for melting zinc. However, in the course of galvanization, substantial quantity of zinc is coated on iron items supplied by KSEB to the petitioner and so much so, there is clear transfer of goods in the course of execution of work by the petitioner. Section 6(1)(f) provides for levy of tax on works contract as follows: “S.6(1)(f). In the case of transfer of goods involved in execution of works contract, where the transfer is not in the form of goods, but in some other form, at the rate of 12.5% and when the transfer is in the form of goods at the rates prescribed under the respective Schedules.” O.T.Revn.85 of 2010 -:5:- 3. In the course of execution of works contract, that is galvanization zinc is not transported in the same form but by way of coating on the iron items supplied by KSEB. It is therefore transfer of goods in some other form attracting tax at 12.5% on the value of goods so transferred. Rule 10(2) of the KVAT Rules provides for determination of “taxable turnover” in respect of transfer of property involved in the execution of works contract. Deductions are provided under Rule 10(2) (i to vii) such as labour charges, hire charges, cost of consumables etc. In the normal course, taxable turnover should be determined by granting deductions provided in the above clause from the gross amount received for the work executed. For reasons not known, petitioner did not furnish the details of the cost of labour, hire charges, cost of consumables etc. for the officer to determine the taxable turnover in terms of the above provisions of the rules. Therefore, the assessing officer applied Rule 10(2)(b) which is as follows: “R.10(2)(b) Where the actual turnover in relation to a works contract, in which the transfer of goods takes place not in the form of goods but in some other form, is not ascertainable from the books of accounts of the dealer or where the dealer has not maintained any accounts, the total turnover in respect of such works contract shall be computed after deducting O.T.Revn.85 of 2010 -:6:- labour and other charges as given in the table below from the total amount of contract. TABLE ------------------------------------------------------------------------------------ Sl. Type of works contract Labour or other charges No. as a Percentage of the value of the works contract. ------------------------------------------------------------------------------------- 1. Electric Contracts 20 2. All structural contracts 30 3. Sanitary contracts 20 4. Tyre re-treading contract 50 5. Dyeing and Textile Printing contracts 50 6. Sculptural contracts or contracts relating to Arts 70 7. Refrigeration, air conditioning or other machinery, rolling shutters, cranes installation contracts 15 8. Installation of plant and machinery 15 9. Laying of pipes 20 10. Installation of elevators (lifts) and escalators 15 11. Installation of air conditioners and air coolers 10 12. Fixing of marble slabs, polished granite stones and tiles (other than mosaic tiles) 25 13. Annual maintenance contract 50 14. All other contracts 25 ------------------------------------------------------------------------------------ 4. It is clear from the table that the specific items provided therein, that is 1 to 13 do not include galvanization. So much so, galvanization is a residuary item where deduction for labour charges provided is 25%. It is by O.T.Revn.85 of 2010 -:7:- applying this provision, the Assessing Officer determined the taxable turnover on galvanizing work, that is by deducting 25% from the contract amount received by the petitioner for galvanizing. The 1st Appellate Authority as well as the Tribunal confirmed this. Even though petitioner pursued the matter in two level appeals and before us, petitioner has no prayer for making assessment in terms of Rule 10(2)(a) of the Act which provides for various deductions stated therein for determination of taxable turnover. In the absence of any such claim, the Assessing Officer has to necessarily determine taxable turnover by applying Clause (b) of Rule 10(2) which is exactly what is done in this case. As already stated, since zinc is not transferred in the same form, but in the form of coating on the products supplied by KSEB, the rate applied at 12.5% also is perfectly in order. We, therefore, do not find any merit in this revision case. Consequently, the same is dismissed. C.N.Ramachandran Nair, Judge. Bhabani Prasad Ray, Judge. sl.