2005 (1) TMI 643 - HC - VAT and Sales Tax

Court Upholds 10% Tax on Design & Construction of Cooling Towers

Gammon India Ltd. Versus Additional Commissioner of Commercial Taxes, Zone-II, Bangalore and others

The court upheld the revisional authority's decision to tax the works contract for the design and construction of natural draught cooling towers at 10% ... - Issues Involved:1. Classification of the works contract for tax purposes.2. Applicability of the composition scheme under Section 17(6) of the Karnataka Sales Tax Act, 1957.3. Interpretation of the term 'civil works' under the Act.4. Applicability of Entry 41 of the table appended to Section 17(6) of the Act.5. Justification of the revisional authority's decision to tax the contract at 10%.Detailed Analysis:1. Classification of the Works Contract for Tax Purposes:The appellant, a works contractor, engaged in the construction of civil structures including cooling towers and dams, sought the benefit under the composition scheme of Section 17(6) of the Karnataka Sales Tax Act, 1957. The assessing authority treated the entire turnover as receipts towards the execution of civil works and levied tax at 2% under Entry 6 of the Sixth Schedule to the Act.2. Applicability of the Composition Scheme under Section 17(6) of the Act:The appellant applied for the benefit under the composition scheme for the assessment year 1993-1994. The assessing authority computed the tax liability at 2% treating the entire turnover as receipts towards civil works. However, the Joint Commissioner of Commercial Taxes revised this, subjecting the entire consideration received towards the works contract executed to tax at 2%.3. Interpretation of the Term 'Civil Works' under the Act:The appellant argued that 'natural draught cooling towers' are buildings and should fall under Item No. 6 of the table appended to Section 17(6) of the Act, which speaks of civil construction like buildings, bridges, etc. The appellant contended that the works contract executed was purely civil work falling under Item No. 6. However, the court noted that the term 'civil works' should be similar to construction of buildings, bridges, roads, etc., and the cooling towers did not fit this description.4. Applicability of Entry 41 of the Table Appended to Section 17(6) of the Act:The Additional Commissioner of Commercial Taxes initiated suo motu revisional proceedings, proposing to bring to tax at the rate of 10% on the turnover relating to natural draught cooling towers under Entry 41 of the table appended to Section 17(6) of the Act. The court observed that Entry 41 specifies 'supply and erection of cooling towers' taxable at 10%. The court noted that the term 'supply' includes sale, and 'erection' is a wider term than 'building.' The contract between the parties was for designing and construction of cooling towers, which the court found to be covered under Entry 41.5. Justification of the Revisional Authority's Decision to Tax the Contract at 10%:The revisional authority confirmed the proposal to tax the contract receipts at 10% under Entry 41, setting aside the orders of the Joint Commissioner and the assessing authority. The court upheld this decision, stating that the cooling towers, though permanent structures, were not akin to buildings. The court also rejected the appellant's contention that Entry 41 only applied to pre-manufactured items erected at the work spot. The court emphasized that if there are two entries-one general and the other special-the special entry should be applied for levying tax.Conclusion:The court dismissed the appeal, holding that the works contract for the design and construction of natural draught cooling towers falls under Entry 41 of the table appended to Section 17(6) of the Karnataka Sales Tax Act, 1957, and is taxable at 10%. The court directed the parties to bear their own costs.