Turnkey works contract classification turns on real contractual scope; turnover tax on declared goods was unsustainable, while inter-State levy issue was remanded.
A turnkey works contract for laying a power transmission line was held not to fall within the Sixth Schedule entry for supplying and fitting electrical goods, because its composite scope covered survey, design, supply, erection and commissioning; it instead fell within the exempting framework under the Fifth Schedule for the relevant period. The levy on goods brought from outside the State could not be decided abstractly, as inter-State sale liability depended on the contract terms and surrounding facts, so the issue was remitted to the Tribunal for fresh examination. Turnover tax on declared goods used in the works contract was held unsustainable under the proviso to section 6-B.
Issues: (i) Whether the works contract for laying the power transmission line fell under entry No. 11 of the Sixth Schedule or under entry No. 55 of the Fifth Schedule to the Karnataka Sales Tax Act, 1957; (ii) Whether the levy on goods brought from outside the State for execution of the works contract could be sustained under the State law; (iii) Whether turnover tax on the declared goods used in the works contract was justified.
Issue (i): Whether the works contract for laying the power transmission line fell under entry No. 11 of the Sixth Schedule or under entry No. 55 of the Fifth Schedule to the Karnataka Sales Tax Act, 1957.
Analysis: Entry No. 11 covered supplying and fitting of electrical goods, and supply and installation of electrical equipment including transformers. The contract in question was a comprehensive turnkey arrangement involving survey, design, supply, erection, commissioning, and allied works for a transmission line. The nature and complexity of the contract showed that it was not a mere case of supply and installation of electrical equipment in the sense contemplated by entry No. 11. The work therefore did not fit within the Sixth Schedule entry, and the exempting entry for works contracts other than those specified in the Sixth Schedule was applicable for the relevant period.
Conclusion: The works contract was not covered by entry No. 11 of the Sixth Schedule; it was outside that specific taxable entry and fell within the exempting framework of entry No. 55 of the Fifth Schedule for the relevant assessment year.
Issue (ii): Whether the levy on goods brought from outside the State for execution of the works contract could be sustained under the State law.
Analysis: The liability could not be determined in the abstract. Whether movement of goods into the State amounted to an inter-State sale depended on the particular terms of the contract and the factual matrix governing procurement, movement, and incorporation of the goods. The record before the Court did not disclose the relevant contractual terms or factual material necessary to decide the issue conclusively. Since the Tribunal is the final fact-finding authority, the matter required a fresh examination on the basis of the contract and the governing constitutional and statutory principles.
Conclusion: The issue was remanded to the Tribunal for fresh consideration.
Issue (iii): Whether turnover tax on the declared goods used in the works contract was justified.
Analysis: The proviso to section 6-B of the Act governed the levy on declared goods, and on the facts the turnover tax could not be sustained.
Conclusion: The levy of turnover tax on the declared goods was not justified and was held against the Revenue.
Final Conclusion: The revisions succeeded only in part. The classification issue and the turnover-tax issue were resolved in favour of the assessee, while the inter-State sale issue was left for reconsideration by the Tribunal on remand.
Ratio Decidendi: A turnkey works contract must be classified by its real nature and composite scope, and whether goods used in its execution are subject to State levy as an inter-State transaction must be decided on the specific contractual terms and facts, not in the abstract.
TaxTMI 
AI Drafter ✕
TaxTMI 
