Source: https://taxcaselaw.com/gst-caselaws/s-c-works-contracts-prior-to-1-4-2006-could-not-be-taxed-at-rates-prescribed-after-amendment-in-karnataka-value-added-tax-act-2003/
Timestamp: 2019-04-21 18:52:30+00:00

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Dr. D.Y. Chandrachud, J .- The State of Karnataka is in appeal from a judgment of a Division Bench of the High Court dated 28 September 2012. The issue before the High Court related to the rate of tax applicable to works contracts prior to 1 April 2006 when Section 4(1)(c) was introduced by an amendment into the Karnataka Value Added Tax Act, 2003 (‘KVAT Act 2003’).
3. 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.
(viii) It is well settled that there is a presumption against redundancy of a statutory provision [Balabhagas Hulaschand v. State of Orissa  2 SCC 44]. Furthermore, the suggestion that individual goods are to be taxed separately in a works contract amounts to re-writing the statute, which is against the settled cannon of interpretation that in a taxing statute nothing can be read in. [Bansal Wire Industries Ltd. v. State of Uttar Pradesh  6 SCC 545].
(c) In respect of other goods, i.e. goods not covered by Section 4(1)(a), @ 12.5% under Section 4(1)(b).
At that time i.e. upto 31.03.2006, there was no provision in the KVAT Act providing for a uniform rate in respect of goods supplied in execution of a works contract. In so far as the expression “other goods” in Section 4(1)(b) is concerned, it only meant and covered the goods other than those covered by Section 4(1)(a). The goods mentioned in the Second, Third or Fourth Schedules (in this case particularly iron and steel covered by Serial No.20 of Third Schedule) were specifically covered by the said Schedules and there could be no scope to consign these specific goods covered by the said Schedules to the residual entry “Other goods” in Section 4(1)(b). This position of law is well settled by the judgments of this Court in Dunlop India Ltd.v. Union of India  2 SCC 241 and Bharat Forge and Press Industries (P.) Ltd. v. CCE 1990 taxmann.com 124 (SC).
(vi) In Gannon Dunkerley’s case (supra) this Court held that it is permissible for the State Legislatures to tax all goods involved in execution of a works contract at a uniform rate. In spite of this, the KVAT Act which came into force on 01.05.2005 did not provide for a uniform rate. The provision for uniform rate in respect of goods supplied in execution of works contracts was inserted only w.e.f.01.04.2006 and consequently it is only for the period from 01.04.2006 that a uniform rate under the newly inserted Clause (c) of Section 4(1) became applicable.
(vii) In so far as the declared goods under Section 14 of the CST Act are concerned, both before and after 31.03.2006, the KVAT Act makes it clear that the rate of tax, even when supplied in execution of a works contract, will be the rate mentioned in Section 15 of the CST Act. Under the KVAT Act as it stood upto 31.03.2006, this position prevailed under Section 4(1)(a) read with Serial No.20 of the Third Schedule. Under the KVAT Act as it stands after 01.04.2006, the said position has been statutorily provided for in Section 4(1)(c) itself which has been made “subject to Sections 14 and 15 of the Central Sales Tax Act, 1956”.
(ix) A review of the VAT enactments of other States would indicate that following the decision in Gannon Dunkerly & Co(supra), some States opted to levy a uniform rate of tax on all goods supplied in the execution of works contracts. Other states provided for different applicable rates. Reference can be made by way of illustration to the VAT Acts for Andhra Pradesh, Delhi, Odisha and Tamil Nadu.
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.
“3. Levy of tax.- (1) The tax shall be levied on every sale of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of this Act.
(d) a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration”.
“(36) ‘Turnover’ means the aggregate amount for which goods are sold or distributed or delivered or otherwise disposed of in any of the ways referred to in clause (29) by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration, and includes the aggregate amount for which goods are purchased from a person not registered under the Act and the value of goods transferred or despatched outside the State otherwise than by way of sale, and subject to such conditions and restrictions as may be prescribed the amount for which goods are sold shall include any sums charged for anything done by the dealer in respect of the goods sold at the time of or before the delivery thereof.
Hence, in the case of a works contract, the sale of goods takes place at the time of the incorporation of the goods in the course of its execution.
The table below clause (m) specifies types of contracts and alongside, labour and like charges as a percentage of the value of the contract. The principle is that expenditure on account of labour charges involved in the execution of works contracts is excluded from the total turnover in order to arrive at the taxable turnover. The liability to pay tax under Section 4 is on the taxable turnover.
13. The dispute in the present case relates to 2005-06. The case relates to the position of law in the State of Karnataka, as it stood until 31 March 2006. There can be no manner of doubt that even prior to 1 April 2006 works contracts were exigible to the levy of tax. The charging section, Section 3, mandates that “the tax shall be levied on every sale of goods”. The expression ‘sale’ in Section 2(29) means ‘every transfer of the property in goods’ including ‘a transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract’. Similarly, the definition of the expression ‘goods’ in Section 2(15) contains a clear reference to “all kinds of movable property” and all materials, commodities and articles (including goods, as goods or in some other form) involved in the execution of works contracts. The chargeability of goods involved in the execution of works contracts both before and after 01.04.2006 is a matter which lies beyond any element of doubt. Such provisions in the state laws – including the State of Karnataka – followed upon the 46th Amendment to the Constitution by which the expression ‘tax on the sale or purchase of goods’ was incorporated in Clause 29A of Article 366 to include taxes on the transfer of property in goods involved in the execution of works contracts.
14. 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 sub-clauses (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 ‘other goods’ the rate of tax was 12.5% under Section 4(1)(b). The expression ‘other goods’ in 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 ‘other goods’, that 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  taxmann.com 42 (SC). After adverting to the decisions in Dunlop India Ltd. (supra), and Bharat Forge and Press Industries Pvt. Ltd. (supra), this Court reiterated that “only such goods as cannot be brought under the various specific entries in the tariff should be attempted to be brought under the residuary entry”. Applying 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 just that.
“… it would be permissible for the State Legislature to tax all the goods involved in the execution of a works contract at a uniform rate which may be different from the rates applicable to individual goods because the goods which are involved in the execution of a works contract when incorporated in the works can be classified into a separate category for the purpose of imposing the tax and a uniform rate may be prescribed for sale of such goods”.
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 be far-fetched to 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 other goods’. The expression ‘in respect of other goods’ meant 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 expressions ‘turnover’ and ‘total turnover’, both 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 sub-rule (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 catch- all 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 High Court. The appeal shall, accordingly, stand dismissed. There shall be no order as to costs.
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  40 taxmann.com 408/42 GST 554 (Kar.). The appeal filed by the State of Karnataka v. Durga Projects Inc.  91 taxmann.com 54 (SC) 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. The appeals are, accordingly, dismissed. There shall be no order as to costs.
This entry was posted in GST Caselaws, Section 9 and tagged In favour of Assessee (GST), Supreme Court Of India on GST, tax applicable to works contract, Year 2018.

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