Case: State of Karnataka &amp; Another Vs. M/s. Durga Projects Inc

The respondent is engaged in executing civil works contacts and is registered both under the KVAT Act and the Central Sales Tax Act. It purchases building materials like hardware, sand and bricks falling under the Third Schedule to the KVAT Act, declared goods under Section 15 of the CST Act and othergoods from within and outside the State and from unregistered dealers. On 31 January 2006 it made an application before the Authority for Advance Clarification and Rulingfor guidance on the rate of tax applicable for the execution of civil works contracts under the KVAT Act. The AAR held by its order dated 2 August 2006 that since there was no specific entry providing for the rate of tax on works contracts up to 31 March 2006, tax on goods used in the execution of works contract should be levied in accordance with the rate of tax applicable to the sale of goods under the KVAT Act 2003. The relevant part of the order is extractedunderstood that there is no specific entry providing rate of tax on works contract under KVAT Act, up toand therefore, tax should be levied as per the rate applicable on the value of each class of goods involved in the execution of works contract. Therefore, as regards the rate of tax on the deemed sales of goods involved in the execution of works contract, it is to be clarified that tax is payable at the rate applicable to the Sale of Goods Act upto 31.03.2006. And by KVAT (Amendment) Act, 2006, Clause (c) has been got inserted to section 4(1) w.e.f. 1.4.2006, for levy of tax in respect of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, and appending VI Schedule to the Act, listing out the items/descriptions of the works contract with the rate of tax corresponding to them. As per entry 23 of the said schedule,other work contracts not specified in any of the above categories including composite contracts with one or more of the aboveare liable to tax @ 12.5% w.e.f. 01.04.2006. The civil works contract falls under the said entry and therefore, is liable to tax @ 12.5% only. Hence, it is clarified accordingly.The dealer sought a further clarification on the issues that were raised in the original application about the rate of tax on iron and steel used in the execution of civil works contracts. By its ruling dated 7 December 2006, AAR held that the rate of tax applicable on iron and steel is 4 per cent when used in the same form, otherwise the rate of tax would be 12.5 per cent.4. Subsequently, an order was passed in revision by the Commissioner of Commercial Taxes (Karnataka), Bangalore, holding that the orders of AAR were erroneous and prejudicial to the interests of the revenue. According to the Commissioner, there is a deemed sale in the course of the execution of a works contract by incorporation of the goods into the work. This is distinct from a normal sale of goods. In the case of a works contract, it is a conglomerate of goods that is transferred and there is no sale of individual goods. According to the Commissioner, both before and after the amendment of Section 4(1)(c) with effect from 1 April 2006, tax is levied on the taxable turnover of goods involved in the execution of a works contract. Taxable turnover in a works contract is determined after allowing deductions from the total consideration admissible under Rule 3(2) of the KVAT Rules 2005. On the other hand, in the case of a normal sale of goods, the aggregate sale price paid for a particular commodity constitutes the taxable turnover. The clarification by AAR was held to be in error in assuming that individual goods purchased for use in the execution of a works contract are transferred in the same form and in ruling that the rates of tax on taxable turnover would be the rates applicable to each of the goods purchased. The matter was kept open to be addressed by the assessing authorities in accordance with law.5. The dealer preferred a sales tax appeal before the High Court of Karnataka, aggrieved by the revisional order of the Commissioner of Commercial Taxes. By its judgment dated 28 September 2012, the High Court allowed the appeal and while setting aside the order in revision held assale under the works contract is a deemed sale of transfer of the goods alone and it is not different from the normal sale. Hence, the tax has to be levied on the price of the goods and material used in the works contract as if there was a sale of goods and materials. The property in the goods used in the works contract will be deemed to have been passed over to the buyer as soon as the goods or material used are incorporated to the moveable property by principle of accretion to the moveable property. Hence, we are of the view that the order passed by the Commissioner is contrary to law. For the period prior totax has to be levied as per Section 3(1) of the Act and for the period subsequent totax has to be levied as per Section 4(1)(c ) of the Act. Hence, the substantial questions of law are held in favour of the817 OF 2018:(Arising out of SLP(C )Nosof 2015)18. The High Court, by its impugned judgment and order dated 25 September 2014 dismissed the Sales Tax Revision Petitions filed under Section 65(1) of the Karnataka Value Added Tax Act 2003 against the order dated 26 August 2013 of the Karnataka Appellate Tribunal, Bengaluru. While dismissing the revisions, the High Court relied upon its earlier decision dated 29 September 2012 in M/s Durga Projects Inc v State of Karnataka (STA 72 of 2010).

Reasoning:
9. To facilitate an analysis of the submissions which have been urged on behalf of the State in appeal, it would be necessary to advert to the provisions of the KVAT Act 2003 prior to 1 April 2006 bearing on the controversy. 1 April 2006 assumes significance because by Karnataka Act 4 of 2006, clause (c) was introduced into Section 4(1) so as to incorporate a specific rate of tax on the transfer of property involved in the execution of works contracts. The rate of tax came to be specified for works contracts of various descriptions in the Sixth Schedule. But even before 1 April 2006, as our analysis would indicate, there is no manner of doubt that works contracts were exigible to the levy of tax under the KVAT Act 2003.Section 4 imposes a liability to pay taxes upon every dealer on his taxable turnover. Besides imposing a liability, Section 4 prescribes the rate of tax. The rate of tax on goods mentioned in the Second, Third and Fourth Schedules was specified in(i), (ii) and (iii) of Section 4(1)(a). The Second Schedule at the material time attracted a rate of 1%, the Third Schedule 4% and the Fourth Schedule, 20%. On ‘otherthe rate of tax was 12.5% under Section 4(1)(b). The expression ‘otherin Section 4(1)(b) evidently means those goods which are not governed by Section 4(1)(a). Where goods are specifically covered by any of the entries of the Second, Third and Fourth Schedules, such goods would be covered by the specific entry relating to those goods. Recourse to the residual provisions of Section 4(1)(b) would be available only in respect of ‘otherthat is, goods which did not fall within the purview of Section 4(1)(a). The law on the construction of a residual entry has been crystalized in several judgments of this Court and it would be appropriate to refer to one of them: HPL Chemicals Ltd. v CCE. After adverting to the decisions in Dunlop India Ltd. (supra), and Bharat Forge and Press Industries Pvt. Ltd. (supra), this Court reiterated thatsuch goods as cannot be brought under the various specific entries in the tariff should be attempted to be brought under the residuaryApplying this principle, where goods are specifically covered by clauses (i), (ii), or (iii) of Section 4(1)(a), recourse to the residual provisions of Section 4(1)(b) would not be available. To allow a residual provision to consume the specific would be to invert the intent of the legislature. The state wants us to do juste underlying this principle is that goods involved in the execution of a works contract can be classified into a separate category, so as to provide for a uniform rate of tax. The real issue before this Court is as to whether prior to 1 April 2006, the State legislature of Karnataka had in fact done so.The answer to this is in the negative, on a plain and natural meaning of the words used.16.The core of the submissions which have been ably projected before the Court by Mr Devadatt Kamat is that the State legislature had in fact prescribed a uniform rate for works contracts, prior to 1.4.2006 in Section 4(1)(b) under which a rate of 12.5% was provided. In his submission, declared goods would be assessed separately; while the balance of the goods in a works contract would be assessed on the total turnover, which is incorporated under Rule 3(1)(c).We find ourselves unable to accept the submission. In our view, it would beto accept that in enacting Section 4(1)(b), the legislature intended to prescribe a uniform rate of tax, prior to 1.4.2006, for goods incorporated in a works contract. The scheme legislated upon in Section 4(1) envisaged specific rates of tax on goods falling within the Second, Third and Fourth Schedules. What Section 4(1)(b) provided was a residual entry under which a rate of 12.5% was provided ‘in respect of otherThe expression ‘in respect of othermeant goods other than those falling in the Second, Third and Fourth Schedules. Declared goods specified in Section 14 of the Central Sales Tax Act, 1956 were comprehended in Serial No.20 of the Third Schedule to the KVAT Act 2003 and attracted a rate of 4%, which applied to goods in that Schedule. As a result of the deeming definition of the expression sale, a transfer of property in goods involved in the execution of a works contract become exigible to tax. Exigibiliy to tax, it is settled law, is distinct from the rate of tax and the measure of the tax. In Gannon Dunkerly & Co, this court expressed the view that it is open to the states to provide a uniform rate of tax on goods transferred in the course of the execution of a works contract. The exigibility to tax is not (as it cannot be) dependent on the state prescribing a uniform rate of tax for goods involved in works contracts. That the KVAT Act 2003 did not provide a uniform rate of tax prior to 01.04.2006 on goods involved in the execution of works contract also becomes apparent when we read the amendment which introduced Section 4(1)(c) by Act 4 of 2006. As a result of the amendment, the legislature provided that the rate of tax in respect of the transfer of property in goods involved in the execution of a works contract would be as provided in the Sixth Schedule. The Sixth Schedule elucidates works contracts of various descriptions and elucidates the associated rates of tax for each distinct category. For declared goods, Section 4(1)(c ) is expressly subject to Sections 14 and 15 of the CST Act 1956. Hence declared goods involved in the execution of a works contract are taxable at the rates mentioned in Section 15 of the CST Act while all other goods involved in the execution of a works contract are taxable at the rate prescribed in the Sixth Schedule upon the amendment. The amendment introducing Section 4(1)(c) took effect on 1 April 2006. The amendment is not clarificatory. It was with effect from 1 April 2006 that the State legislature mandated a uniform rate of tax on goods involved in the execution of works contracts as provided in the Sixth Schedule. The position as it existed upto 31 March 2006 was altered with effect from 1 April 2006. We are, therefore, unable to accept the submission of the State that upto 31 March 2006. Section 4(1)(b) envisaged a uniform rate for the transfer of goods involved in the execution of a works contract. Section 4 imposes the liability to pay tax on every dealer who is or is required to be registered, on his taxable turnover. The concept of taxable turnover in Section 2(34) is defined with reference to the turnover on which a dealer is liable to be taxed, determined after making deductions from the total turnover as prescribed. The concept of taxable turnover thus incorporates the expressionsboth of which are defined in Sections 2(36) and Section 2(35) respectively. The manner in which the total turnover of a dealer is computed is prescribed in Rule 3(1)(b), in the case of a normal sale, and in Rule 3(1)(c), for the purposes of a works contract. In the case of a works contract, deductions are envisaged under(2) of Rule 3, which includes amounts such as labour and other charges. Section 7 provides that the sale of goods shall be deemed to have taken place at the time of the transfer of title or possession or incorporation of the goods in the course of the execution of a works contract. In our view, the interpretation which we have placed on the provisions of the Act as they existed prior to 1.4.2006 is consistent with the plain meaning of the words used by the legislature. We are unable to subscribe to the submission which has been urged on behalf the appellant that Section 4(1)(b), as it existed prior to 1.4.2006 was a catchall entry providing for a uniform rate of tax on goods involved in the execution of a works contract. Such a construction does not emerge from the plain meaning of the words used and is in fact belied by the need which was felt by the legislature to impose a uniform rate of tax only with effect from 1 April 2006. Before concluding, we need to clarify that the genesis of the present dispute arises out of the proceedings which were initiated before AAR by the respondent seeking guidance on the applicable rate of tax on the law as it existed until 31.03.2006. This proceeding concludes the issue of interpretation. We clarify, by way of abundant caution, that issues of a factual nature, will fall for adjudication in the course of assessment proceedings. It was open to state legislatures to provide uniform rates of tax on goods involved in the execution of works contracts. Many state legislatures did so. The Karnataka legislature did so with effect from 1.4.2006, not earlier.17. For the above reasons, we find that there is no merit in the challenge preferred by the State of Karnataka to the impugned judgment and order of the Highappeal filed by the State of Karnataka (Civil Appeal No.811 of 2018) in the matter of M/s Durga Projects Inc. has been dismissed by this Court. No separate submission has been raised in the present appeals.