M/S Durga Projects Inc, vs The State Of Karnataka on 28 September, 2012
Author: K.Sreedhar Rao B.Manohar 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 28TH DAY OF SEPTEMBER 2012 PRESENT THE HON'BLE MR. JUSTICE K.SREEDHAR RAO AND THE HON'BLE MR. JUSTICE B.MANOHAR STA No.72/2010 BETWEEN : M/S DURGA PROJECTS INC, 15, BULL TEMPLE ROAD, GANDHI BAZAR, BANGALORE - 560 004, (REPRESENTED BY ITS PARTNER NEERAJ JHUNJANWALA). ...APPELLANT (BY SRI.B.G.CHIDANANDA URS & SRI.B.S.PRASAD, ADVS) AND: 1. THE STATE OF KARNATAKA THROUGH THE SECRETARY FINANCE DEPARTMENT VIDHAN SOUDHA, BANGALORE. 2. COMMISSIONER OF COMMERCIAL TAXES VTK, GANDHINAGAR, KALIDASA ROAD, BANGALORE ...RESPONDENTS (BY SMT.S.SUJATHA, AGA) 2 STA FILED UNDER SEC. 66(1) OF THE VALUE ADDED TAX ACT, 2003, AGAINST THE ORDER DATED:12.10.2010 PASSED IN KVAT/SMR/CR-11/10-11 ON THE FILE OF THE COMMISSIONER OF COMMERCIAL TAXES, GANDHINAGAR, BANGALORE, SETTING ASIDE THE PORTION OF THE ORDERS OF THE ACAR DATED 28.2.2006 AND 7.12.2006 RELATILNG TO THE CLARIFICATION OF THE RATE OF TAX APPLICABLE ON THE TRANSFER OF PROPERTY IN GOODS INVOLVED IN THE COURSE OF EXECUTION OF WORKS CONTRACT UPTO 31.3.2006. THIS STA HAVING BEEN HEARD AND RESERVED AND COMING ON FOR PRONOUNCEMENT OF JUDGEMENT THIS DAY, B.MANOHAR J., DELIVERED THE FOLLOWING: JUDGEMENT The appellant is a Partnership Firm registered under the provisions of Karnataka Value Added Tax Act, 2003 (hereinafter referred to as KVAT Act) engaged in the business of civil works contract, purchase of necessary building materials, hardware, the goods falling under III schedule, the declared goods under Section 15 of the CST Act and other non-scheduled goods within and outside the State as well as from the unregistered dealers. 2. The appellant made an application under Section 60 of the KVAT Act before the Authority for Clarifications and Advance Rulings (ACAR for short) seeking for clarification in respect of : 3 a) Applicability of the rate of tax on execution of civil works contract under the Act; and b) Whether input tax credit can be availed out of output tax paid by the Contractor. 3. The ACAR after examining the matter in detail, by its order dated 2-8-2006 came to the conclusion that there is no specific entry providing rate of tax on works contract under the KVAT Act, up to 31-3-2006 and 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 i.e. if the goods involved are taxable at the rate of 4%, then works contract rate would be at 4% and if the rate is 12.5%, the works contract rate would also be at 12.5%. With regard to the clarification of input tax credit is concerned, no finding has been given. The appellant subsequently sought for rectification of the order dated 2-8-2006 before the ACAR. The ACAR further clarified on 7-12-2006 stating that iron and steel is one of the commodities specified under Section 14 of the CST Act 1956, as goods of special importance and therefore, the iron and steel are to be subjected to works contract tax at 4%, when it was used in the same form and if they are used in manufacture or fabrication of product, it would no longer qualify as iron and steel and would have to be subjected to works contract tax at 12.5%. 4 4. The Commissioner for Commercial Taxes after noticing the clarification order passed by the ACAR found that the order passed by the ACAR is erroneous and prejudice to the interest of the revenue and issued notice under Section 64(2) of the Act on 25-8-2010. The appellant has filed detail objections to the said notice. The Commissioner for Commercial Taxes after considering the objections filed by the appellant by its order dated 12-10-2010 set aside the order passed by the ACAR in exercise of its suo-motu revisional power and held that the goods used in the works contract cannot be treated on par with the normal sale of goods for the purpose of arriving at the rate for the period prior to 1-4-2006. Further, the iron and steel or any other declared goods used for executing the works contract would be liable to be taxed as per the State Law. The appellant, being aggrieved by the order dated 12-10-2010 passed by the Commissioner for Commercial Taxes has preferred this appeal. 5. Sri.B.G.Chidananda Urs, the advocate appearing for the appellant contended that the order passed by the Commissioner under Section 64(2) of the Act is contrary to law. The order of the Commissioner has the effect of taking away the powers of the ACAR setting aside the order and not deciding the issue that has been raised before the ACAR. He further contended that Section 3(1) of the KVAT Act provides for the State to levy tax on every 'sale of goods' in the State by the registered dealer or a dealer 5 liable to be registered in accordance with the provisions of the Act. The definition of the 'sale' includes 'deemed sale'. The finding of the Commissioner that the concept of 'deemed sale' should be applied only to the conglomerate of goods and not in its independent firm is against the definition of the 'sale' under Section 2(29) of the KVAT Act. Further the expression 'goods' under article 336(29-A) would mean goods in the same form or some other form. The finding of the Revisional Authority at para 4 would be opposed to the deeming fiction introduced by 45 th amendment of the Constitution. Section 4(1)(c) has been introduced by the State Government w.e.f. 1-4-2006 and the rate of tax is provided under the Statute. Hence, there cannot be any rate prior to 1-4-2006. Further the decision of this court in NAGARJUNA CONSTRUCTIONS COMPANY LIMITED AND OTHERS v/s STATE OF KARNATAKA (in W.P.Nos.29932-33/2009) will cover the field. Wherein this court held that steel and steel products having been used as a raw material and incorporated into civil works or other works contract in the same form, except that the same was fashioned to suit the requirement, before the same was merged into the works did not loose their nature or form and therefore could not be subjected to tax as the goods have already suffered tax as declared goods under CST Act and sought for setting aside the same. 6 6. On the other hand, Smt.S. Sujatha, learned Additional Government Advocate argued in support of the order passed by the Revisional Authority and contended that the finding of the ACAR is contrary to law and prejudicial to the interest of the revenue. She further contended that as per the definition of 'goods', it includes all materials, commodities and articles involved in the execution of works contract. The rate of tax is on the value of goods involved in the execution of the works contract and not a separate value of each of the goods. Even when there is no schedule of works contract under the Act prescribing rate of tax on different types of works contract, the tax liability exists up to 31-3-2006, on the value of goods involved in the execution of works contracts, but not on individual goods as ruled by the ACAR. Further she has contended that in works contract, tax on value of the goods incorporated into the works, when not specified in any of the schedules to the Act, has to be construed as a levy on unscheduled goods and therefore subjected to tax under Section 4(1)(b) of the Act, at the rate of 12.5%. Further, the ACAR has not examined whether the goods purchased were converted into the goods before incorporation into the works is to be examined. This aspect of the matter has also not been considered by the ACAR. Hence, the order passed by the ACAR cannot be sustainable and sought for dismissal of the appeal. 7 7. The substantial questions of law that arise for consideration in this appeal are: i) Whether the Revisional Authority is justified in reviewing the order of the ACAR, which has only clarified the queries made by the appellant? ii) The finding of the revisional authority that the goods used in the works contract cannot be treated on par with the normal sale of goods for the purpose of arriving at the rate of tax for the period prior to 1-4-2006? 8. Section 3(1) of the Act provides for levy of tax 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 the Act. Section 4 of the Act deals with the rate of tax on every sale of the goods, which reads as under: 4. Liability to tax and rates thereof 1) Every dealer who is or is required to be registered as specified in Sections 22 and 24, shall be liable to pay tax, on his taxable turnover, a) in respect of goods mentioned in.- i) Second Schedule, at the rate of one per cent, ii) Third Schedule, at the rate of four percent (in respect of goods specified in serial number 30 and five per cent in respect of other goods), and 8 iii) Fourth Schedule, at the rate of twenty per cent b) In respect of. - i) cigarettes, cigars, gutkha and other manufactured tobacco at the rate of fifteen per cent; ii) other goods at the rate of thirteen and one half per cent.) c) in respect of transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract specified in column (2) of the Sixth Schedule, subject to Sections 14 and 15 of the Central Sales Tax Act, 1956 (Central Act 74 of 1956), at the rates specified in the corresponding entries in column (3) of the said Schedule.] 9. Section 4(1)(c) was inserted by Act No.4 of 2006 w.e.f. 1-4-2006 thereby levying tax on the works contract by specifying the rate of tax under the Sixth Schedule. Prior to the amendment, the tax is being collected on the rate applicable to sale of each class of goods under Section 3(1) of the Act. In view of the insertion of sub-Section 4(1)(c) to the Sixth Schedule to the Act, the appellant made an application before the ACAR with regard to the rate of tax applicable on the execution of civil works contract up to 31-3-2006 and thereafter under Karnataka Value Added Tax. The ACAR by its order dated 2-8-2006 clarified the same. Subsequently, on further clarification sought for by the appellant, the ACAR by its order dated 07-12-2006 further clarified that if the iron and 9 steel is used in the same form in the course of execution of the works contract, it is liable to tax at 4% as per Section 4(1)(c) of the Act. However, the Commissioner feels that clarification made by the ACAR is prejudicial to the interest of the revenue, insofar as clarification regarding the rate of tax on works contract prior to 31-3-2006. Accordingly issued notice and reviewed the order passed by the ACAR. 10. Section 3(1) of the Act provides for levy of tax on every sale of goods. Section 4 prescribes the rate of tax. Neither Section 3 nor Section 4 of the Act seeks or intend to levy or prescribe different rate of tax for the goods involved in the normal sale and for the goods involved in the deemed sale. Both normal sale as well as the deemed sale should be treated as one and the same with respect to levy of tax on sale of goods. The Commissioner opined that the rate of tax is on the value of goods involved in the execution of works contract and not on separate value of each goods. Thus, even when there is no schedule of works contract under the Act prescribing the rate of tax on different type of contract, the tax liability exists upto 31- 3-2006. It falls under Section 4(i)(b). Hence, levy of tax has to be under Section 4(i)(b). The finding of the ACAR is contrary to law. On the other hand, the appellant contended that only from the amendment of the Act w.e.f. 1-4-2006 in respect of transfer of property in goods whether as goods or in some other form involved in the execution 10 of works contract, specified in column 2 of the Sixth Schedule subject to Sections 14 and 15 of the Central Act, 1956, at the rates specified in the corresponding entry in column No.3 of the said Schedule can levy. The amendment is prospective in operation. The action has already been done prior to 31-3-2006 and the tax cannot be levied under Section 4(1)(c) of the Act. The appellant also relied upon the judgment made in STA No.14/2010 in M/S.MANGALORE MINERAL PRIVATE LIMITED v/s STATE OF KARNATAKA disposed of on 12-3-2010 and contended that the amendment is only a prospective operation and cannot be claimed retrospectively. Admittedly, prior to 1-4-2006 insertion of clause (c) to Section 4, the rate of tax was not prescribed in respect of transfer of the property in goods, (whether as goods or in any other form) involved in the execution of works contract. Hence, the tax has to be levied as per Section 3(1) of the Act. The sale 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 work 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 to 1-4-2006, tax has 11 to be levied as per Section 3(1) of the Act and for the period subsequent to 1-4-2006, tax has to be levied as per Section 4(1)(c) of the Act. Hence, the substantial questions of law are held in favour of the appellant. 11. Accordingly, we pass the following: ORDER The appeal is allowed. The order passed by the Commissioner is set aside the order passed by the ACAR is restored. Sd/- JUDGE Sd/- JUDGE
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