Declared goods in works contracts stay protected until incorporation, but manufactured fabricated goods may attract residuary tax.

Declared goods used in a works contract remain protected by the Central Sales Tax restrictions only if they retain their identity at incorporation; iron and steel that continued as declared goods could not be taxed at a higher residuary rate. Advance receipts paid before incorporation were treated as mobilisation amounts and not turnover, so the rule deeming them taxable before the statutory transfer event was inconsistent to that extent. By contrast, M.S. plates and sheets that were cut, rolled, welded and fabricated into bullet-tank sections lost their original commercial identity through manufacture, permitting tax at the applicable residuary rate.

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Issues: (i) Whether iron and steel, being declared goods, could be subjected to tax at 12.5% under the residuary works-contract entry instead of the rate controlled by the Central Sales Tax regime; (ii) whether the explanation to Rule 3(1) of the Karnataka Value Added Tax Rules, 2005 could include advance amounts in total turnover before incorporation of goods in the works; (iii) whether M.S. plates and sheets used for fabrication of bullet tanks ceased to be declared goods so as to attract tax under the residuary entry.

Issue (i): Whether iron and steel, being declared goods, could be subjected to tax at 12.5% under the residuary works-contract entry instead of the rate controlled by the Central Sales Tax regime.

Analysis: The constitutional scheme under Article 366(29A)(b) treats transfer of property in goods involved in a works contract as a deemed sale, but that power remains subject to Articles 286 and the restrictions in Sections 14 and 15 of the Central Sales Tax Act, 1956. Declared goods cannot be taxed beyond the statutory ceiling merely because they are used in a works contract. The controlling question is whether the goods retain their identity as declared goods at the time of incorporation. If they do, the State cannot invoke the residuary entry to levy a higher rate.

Conclusion: The State could not levy 12.5% on iron and steel that retained their character as declared goods; the levy was limited by the Central Sales Tax restrictions and the assessee succeeded on this issue.

Issue (ii): Whether the explanation to Rule 3(1) of the Karnataka Value Added Tax Rules, 2005 could include advance amounts in total turnover before incorporation of goods in the works.

Analysis: Turnover under the Act is tied to a sale or deemed sale, and Section 7 fixes the time of sale at transfer of title, possession, or incorporation of goods in the course of execution of the works contract. An advance paid before any such event is only a mobilisation payment and does not represent consideration for a completed taxable transfer. A rule that deems such advance to be part of turnover before the taxable event occurs is inconsistent with the charging provision and the constitutional definition of sale in works contracts.

Conclusion: The explanation to Rule 3(1) was held to be ultra vires to the extent it brought advance receipts into turnover before incorporation, and the assessee succeeded on this issue.

Issue (iii): Whether M.S. plates and sheets used for fabrication of bullet tanks ceased to be declared goods so as to attract tax under the residuary entry.

Analysis: On the facts, the plates were not used in their original form. They were cut, rolled, welded, fabricated into sections, and then assembled and embedded into the project as bullet tanks. That process brought about a change in form and commercial identity amounting to manufacture, with value addition before incorporation. Once the goods ceased to be the same declared goods at the time of incorporation, the restriction in Section 15 of the Central Sales Tax Act did not apply, and the residuary rate under the Sixth Schedule could be invoked.

Conclusion: The levy of tax at 12.5% on the fabricated bullet-tank sections was upheld, and this issue was decided in favour of the revenue.

Final Conclusion: The common order was sustained to the extent it protected declared goods from excessive taxation and struck down the rule dealing with advance turnover, while the higher levy on fabricated bullet-tank sections was maintained because the goods had undergone manufacture and lost their declared-goods character.

Ratio Decidendi: In a works contract, declared goods remain protected by Sections 14 and 15 of the Central Sales Tax Act, 1956 only so long as they retain their identity at incorporation, whereas goods that undergo manufacturing transformation before incorporation may be taxed at the rate applicable to the transformed goods; advance receipts cannot be treated as turnover before the statutory taxable event occurs.

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