2014 (6) TMI 589 - HC - VAT and Sales Tax

Court allows appeal, exempts inter-State purchase turnover from tax under Karnataka Sales Tax Act

M/s ASEA BROWN BOVERI LTD. Versus THE STATE OF KARNATAKA

M/s ASEA BROWN BOVERI LTD. Versus THE STATE OF KARNATAKA - [2014] 70 VST 84 (Kar) Issues Involved:1. Whether the turnover pertaining to inter-State purchases of goods used in the execution of works contract is liable to tax under Section 5-B of the Karnataka Sales Tax Act, 1957.2. Whether the assessee is entitled for exemption from tax on inter-State purchases of goods used in the execution of works contract under Section 5-B of the Act.Detailed Analysis:Issue 1: Whether the turnover pertaining to inter-State purchases of goods used in the execution of works contract is liable to tax under Section 5-B of the Karnataka Sales Tax Act, 1957.The core issue revolves around whether the inter-State purchases of goods used in the execution of a works contract are taxable under Section 5-B of the Karnataka Sales Tax Act, 1957. The assessee contended that the goods procured in the course of inter-State trade were already taxed under the Central Sales Tax Act and thus should not be taxed again under Section 5-B of the Karnataka Act. The Second Revisional Authority, however, revised the earlier order and brought the turnover pertaining to inter-State purchases under the tax net, arguing that the goods were stored by the assessee and not directly used in the works contract, thus not qualifying as an inter-State sale under Section 3(a) of the Central Sales Tax Act.The court examined various precedents, including K.G. Khosla & Co. (P) Ltd. vs. Deputy Commissioner of Commercial Taxes, where it was held that the movement of goods from one state to another as an incident of the contract qualifies as an inter-State sale. The court also referred to Indure Ltd. vs. C.T.O. and others and Union of India vs. Khosla and Company Ltd., which reiterated that the movement of goods incidental to the contract suffices for it to be considered an inter-State sale.The court concluded that the movement of goods from other states to Karnataka was indeed an incident of the contract between the assessee and KPTCL. The goods were procured with the approval of KPTCL, inspected, and delivered directly to the project site, thus satisfying the criteria for an inter-State sale.Issue 2: Whether the assessee is entitled for exemption from tax on inter-State purchases of goods used in the execution of works contract under Section 5-B of the Act.The court analyzed the definition of 'taxable turnover' under Section 2(u-1) of the Karnataka Sales Tax Act, which explicitly excludes the turnover of purchases or sales in the course of inter-State trade or commerce. It also examined the definition of 'total turnover' under Section 2(u-2), which includes the aggregate turnover in all goods of a dealer at all places of business in the State.The court noted that the legislative power of the State under Entry 54 of the State List is subject to the limitations imposed by Entry 92-A of List I and Article 286 of the Constitution, which prohibits the State from taxing inter-State sales. The court emphasized that the Forty-Sixth Amendment to the Constitution, which allowed the State to tax the transfer of property in goods involved in the execution of works contracts, did not extend to transactions that are inter-State in nature.The court concluded that the State Legislature cannot impose tax on inter-State transactions, as per the constitutional limitations and the definitions provided in the Karnataka Sales Tax Act. Therefore, the assessee is entitled to exemption from tax on inter-State purchases of goods used in the execution of the works contract.Conclusion:The court allowed the appeal, setting aside the order of the Second Revisional Authority and confirming the order of the First Revisional Authority, which had dropped the proposal to levy tax under Section 5-B of the Act on inter-State purchases of goods used in the execution of the works contract. The court held that the turnover pertaining to inter-State purchases is not liable to tax under Section 5-B of the Karnataka Sales Tax Act, 1957, and the assessee is entitled to exemption.