TaxTMI 
TaxTMI 
2009 (9) TMI 933
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....the appellant dealer in respect of the subject matter of appeal and in respect of the other part of the appeal which had not been allowed by the Tribunal as against the order of the Joint Commissioner, the present revision petition. 3. The revision petition has been admitted to examine the following question of law as arising out of the order of the Tribunal was right in: (i) not allowing, while computing taxable turnover, deduction in respect of depreciation on plant and machinery owned and used by the Petitioner for executing the works contracts? (ii) Not allowing deduction in respect of: (a) Interest charged by clients; (b) Postage, telephone and telex expenses; and (c) Vehicle tax (iii) holding that TOT would be leviable on materials supplied by clients for use in execution of the works contracts (iv) not taking note of restrictive legal scope of the chagrining provisions of the Section 5B of the Act r/w. Rule 6(1)(c) of the Rules to examine whether levy of tax is permissible without allowing deduction of various expenses including those referred above? 4. We have heard Sri. Suryanarayana, learned counsel appearing for the petitioner and Sri. Manjunat....
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.... the rates specified in the corresponding entries in column (3) of the said schedule." 9. The nature of works contract identified for the purpose of tax and the rate which goods involved in the execution of such works contract are to be subjected to tax is found in Schedule Vi of the Act. 10. in so far as the activity of the petitioner is concerned, having regard to the nature of works contract that is being executed by them, the said activity is without any dispute one falling within entry VI of the Schedule VI to the act i.e., Civil works like construction of buildings, bridge, roads etc and during the relevant period attracted tax at the rate of 80%. 11. The entire exercise being one of ascertaining the value of the goods passing from the contractor to his client on the execution of the works contract, the sum total of which constitute the taxable turnover of the dealer as the expression occurs not only in Section 5(b) but as defined under Section 2(u) (i) reading as under: 2. Definition:-(1) In this Act, unless the context otherwise requires,- (u-1) "Taxable turnover" means the turnover on which a dealer shall be liable to pay as determined shall be l....
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....21, 22, 23, 24, 25, 28, 29], 30, 31, 32, 33, 34, [37, 38, 39 and 41] of the Sixth schedule; (i) to (iii) xxxxxxx (iv) Such amounts towards labour charge and other like charge not involving any transfer of property in goods actually incurred in connection with the execution of works contract, or Explanation-I:-For the purpose of clause (m) and (n) of sub-rule (4), labour and other like charge include, charges for obtaining on hire or otherwise machinery and tools used for execution of Works Contract, charges for planning, designing and architects fees, cost of consumables used in the execution of the Works Contract, cost of establishment to the extent relatable to supply of labour and services and other similar expenses relatable to supply of labour and services. 13. In respect pf the determination of the taxable turnover of the dealer for the two accounting periods referred to above, while the process of determination of the tax liability was on, the appellant dealer had claimed the following deduction as deduction to be allowed even in terms of the rule, from out of the value of the works contract to arrive at the value of the taxable goods involved in the works ....
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.... Materials Rs. 25,49,481-00 Rs. 47,86,01,121-00 Less Exemptions Rs. 46,18,37,337-00 Rs, 1,67,63,784-00 Add: Excess expenditure over receipts Admitted to tax during 1992-93 Rs. 8,11,31,799-00 Taxable Turnover Rs. 9,78,95,853-00 Classification of Taxable Turnover 1) Works contract receipts Rs. 19,13,183-00 4% Rs. 76,527-00 relating to M/s. KPC Limited, Raichur vide Govt. Notification, Dt:11-7-86 and 31-3-1987. 2) Works Contract receipts relating to KEB Bangalore of Electronic works Rs. 1,55,031-00 10% Rs. 15,503-00 3) Cost of Steel used in Contract works Rs. 5,63,39,798-00 4% Rs. 22,53,592-00 4) Civil Contract Receipt Rs. 3,60,88,207-00 8% Rs. 28,87,057-00 B/F Rs. 9,44,96,219-00 Rs. 53,32,679-00 5) Works contract receipt of Structural works Rs. 8,49,883-00 7% Rs. 59,492-00 6) Sale of Steel Scrap & Items Rs.24,35,361-00 4% Rs. 97,4141-00 7) sale of Un-serviceable articles Rs.1,14,120-00 7% Rs. 7....
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....15. It was now the turn of the Joint Commissioner to Exercise his sou motu revisional jurisdiction being of the opinion that the assessment orders as passed by the Assessing Authority on remand were not correct and that they were prejudicial to the interest of the revenue and therefore proposing exercise of jurisdiction under Section 21 of the Act to revise the two assessment orders of the Assessing Authority (later done as per the show-cause notice dated 10-1-2001), (produced as Annexures F1 and F2) as the revisional authority was of the view that the assessee was not entitled to claim deduction in respect of the following expenditure/claims even in terms of the provisions of Rule 6(4)(n)(iv) Explanation I, issued a show-cause notice to the dealer as to why such deductions as permitted by the Assessing Authority should not be excluded but to be added back o the value of the goods which in turn will have the effect of increasing the tax liability: "(b) The assessing authority has allowed exemption of tax under section 6-B on the sales tax paid, customs duty and bank charges etc., in all at Rs. 1,29,00,628-00 as indicated below. 1) Sales tax customs duty paid Rs. 14,58,127.....
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....en to discuss the deduction in respect of interest charged by clients by advance, postage, telephone, telex expenses and vehicle tax. The above three items are relatable only to the period 1991-92 but did not vary the addition to the value of the goods as was done by the revisional authority. In so far as the levy of turn over tax, the stand of the assessee that the value of the material supplied which has gone into the execution of the works contract should be excluded in calculating the turnover of the dealer, did not find acceptance and the question farmed by the Tribunal in this aspect as question No. 2 and reading as under: "2. Whether the RA was justified in levying TOT in respect of the values representing materials supplied by the Client for use in the execution of works contract?" was answered in the affirmative and against the petitioner dealer following the judgment of the Supreme Court in the case of Cooch Bihar Contractors Association Vs. State of West Bengal reported 103 STC 477. It is in respect of such orders passed by the Tribunal in the two appeals before it for the two accounting periods the present revisions petitions on the questions as extracted above fo....
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....visions would submit that the deductions claimed by the writ petitioner dealer and which have not been allowed even by the Tribunal are all deductions which are within the contemplation of the statutory provision I terms of the explanation I to sub clause (iv) clause (n) of sub rue 4 of rule 6. Submission is that the value of the depreciation on plant and machinery utilised by the petitioner for the purpose of execution of the works contract is a part of expenditure which the assessee would have otherwise incurred if the contractor should have hired such machinery from an outside source and for which the contractor has to necessarily pay the hire charges within the meaning of the explanation I relatable to charge on obtaining on hire or otherwise machinery and dealers machinery used on works contract. Submission is that the depreciation amount claimed is on par with this hire charges expressly permitted in terms of explanation I and though is not necessarily an items which was subject matter of discussion before the Supreme Court in 2^nd Denkerley's case in the sense the Supreme Court was not ceased of the word 'depreciation' in the context of examination of the scope for reducing ....
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....be arrived at by deducting expenses incurred by the contractor for providing labour and other services from the value of the works contract. 6. The charges for labour and services which are required to be deducted from the value of the works contract would cover (i) labour charges for execution of the works, (ii) amount paid to a sub-contractor for labour and services, (iii) charges for obtaining on hire or otherwise machinery and tools used for execution of the works contract, (iv) charges for planning designing and architect's fees, and (v) cost of consumables used in the execution of the works contract, (vi) cost of establishment of the contractor to the extent it is relatable to supply of labour and services, (vii) other similar expenses relatable supply of labour and service, and (viii) profit earned by the contractor to the extent it is relatable to supply of labour and services." 23. Learned counsel would submit that such expenditure incurred by the dealer though is quantified with reference to the depreciation as recognized under other enactment and as computed under other enactments in nevertheless a deductible expendi....
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...., that the Revisional Commissioner was in error in dis-allowing the same and the Tribunal has committed a further error by its inaction on this aspect by not even adverting to the contentions urged on behalf of the assessee on this aspect. It is therefore submitted that the three other questions amongst the 4 questions determined for answering should also be answered in favour of the appellant dealer and in the negative. 25. On the other hand, appearing on behalf of the State, Sri. Manjunath, learned AGA submits that the Commissioner was fully justified in revising the order passed by the Assessing Authority; that such a correction was warranted even in terms of the judgment of the Supreme Court in the decision of 2^nd GANNON DUNKERLEY's case (supra); that a deduction for a claim in the nature of depreciation was never in contemplation of the discussion before the supreme Court in the 2^nd GANNON DUNKERLEY's case (supra); that have been indicated as plausible deductions which can be claimed from out of the value of the contract for arriving at the value of the goods passing on the execution of the work under the contract are all expressly discussed in paragraph 8 of the judgment....
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....ed to claim a deduction in the nature of depreciation while computing the value of the goods passing to the buyer in the course of the execution of a works contract and any such deduction being statutorily regulated and there being no scope for claiming a further deduction on any other nature, there is no way of the assessing officer allowing such a deduction and therefore, the Commissioner has rightly revised the order of the Assessing Authority and equally rightly the Tribunal has declined to interfere with the action of the Revisional Authority. 27. It is in the background of such submissions we are required to examine the questions. 28. It is now history that the Constitutional 46^th amendment by which the 'Article' providing for defining the words and phrases used in the Constitution vis., Article 366 came to be amended by way of insertion of clause (29-A) and his was in the wake of the various judgments of the high court and the Supreme Court indicating the scope of levy of sales tax Entry 54 of List II in Schedule VII to the Constitution of India. The 1^st DUNKERLEY's case (supra) viz., originating from the madras High Court in the case of GANNON DUNKERLEY & CO. (MADRA....
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.... a purchase of those goods by the person to whom such transfer, delivery or supply is made;)" 29. Though such a definition was found in sub-article (29-A), it was obviously corresponding to and linked to Entry 54 of the List II. This amendment by itself was not of much significance, unless the State Legislatures gave expression to this, in their respective sales tax enactment and that is the history of finding 5-B of the Act in the statute, with which we are directly concerned in this case. 30. Section 5-B itself was introduced in The Karnataka Sales Tax Act, 1957, by way of an amendment in terms of Karnataka Act No. 27/1985, given effect to from 1.4.1986. For the purpose of ascertaining the taxable turnover from out of the value of the contract and in terms of the very Section 5(B) r/w the phrase taxable turnover. Rule 6 of the Karnataka Sales Tax Rules, 1957, provided for the manner of arriving in terms of the Rules. Rule 6 reads as follows:- RULE 6: "Determination of total and taxable turnover-[(1) The turnover of a dealer, for the purposes of the Act, shall be the aggregate of- [(a) the total amount paid or payable by the dealer as the consideration for the purchase....
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.... xxxxxxxxxxxxxxx )n) in the case of works contracts specified in serial numbers 6,13, 14, 15, 16, 2[18, 19, 20, 21, 22, 23, 3[24. 25, 4[28.] 29] 30, 31, 32, 33, 34, [xxx] 6[37 m 38, 39 and 41] of the sixth schedule; 7[(i) all amounts received or receivable in respect if any goods other than the goods taxable under sub-section (1A) or (1-B) of Section 5 which are purchased from registered dealers liable to pay tax under the Act.] 1[i) all amounts received or receivable in respect of goods specified in second, third and fourth schedules which are purchased from registered dealers liable to pay tax under the Act]. (ii) [all amounts received or receivable in respect of goods] which are specifically exempted from tax under any of the provisions of the Act; (iii) all amounts paid to sub-contractors as the consideration for execution of works contract whether wholly or partly: Provided that, no such deduction shall be allowed unless the dealer calming deduction produces proof that the sub-contractor is a registered dealer liable to tax under the Act and that the turnover of such amounts is included in the monthly statements of return of turnover, as the case ....
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....r levy of sales tax is within the scope of levy of tax only on the value of the goods passing in the particular activity. 32. In the wake of such historical background and legislative development, the subsequent judgment of the Supreme Court declaring law on the subject in the provision particular, the charging Section found in the sales tax enactment's of the States will be sustainable only if it confirms the charge, on the value of the goods involved in the execution of the work and levy is only when such goods are sold and nothing beyond. 33. It is also an equally accepted proposition that while the works contract is executed and the consideration for which the contract is executed by the contractor for the benefit of its client is not the value of the goods itself, as in the execution of a works contract several other input components are present and unless the precise value of the goods passing on the execution of the works contract is ascertained and levy of tax is contained to that value alone, the possibility of the charging section itself falling for the unworkability of the procedural provisions, which in this cases is Rule 6 of the Rules and in urn also rendering t....
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....d the same even in terms of the language of Explanation I as quoted above and particularly, to be one within the scope of "other similar expenses relatable to supply of labour and services." 35. We find the submission of Sri. Suryanarayana, learned counsel for the appellant attractive enough for acceptance, for the reasons that Section 5-B of the Act is only as a sequel to sub-clause (b) of sub-article (29A) of Article 366 which reads as "a tax on the transfer of the property in goods (whether as goods or in some other form) involved in the execution of a works contract;" 36. While a levy of tax of such nature, as indicated in clause (b) is nevertheless a tax on sale or purchase of goods, though the goods may not be identifiable for such purpose on the execution of the works contract. A combination of Article 366 clause (29A) (b) r/w Section 5-B of the Act, having enabled such a levy to be sustainable but within the limits of Entry 54 List II, the provisions of Section 5-B remains sustainable and does not become unconditional. This is achieved only if the charge ....
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....the submission cannot be accepted for the purpose of Section 5-B of the Act, as an understanding of this nature would render Section 5-B of the Act itself unconstitutional. 38. It is for this reasons that we eschew such a limited meaning to the Explanation and accept the meaning to the explanation as canvassed by Sri. Suryanarayana, learned counsel for the petitioner. Therefore, we are of the definite view that both the Commissioner and the Tribunal were in error in disallowing the claim made by the dealer, towards proportionate depreciation of the machinery and tools to the extent they have been exclusively used for the execution of the works contract and owned by the dealer 39. While the extent of usage of machinery and tools in the execution of any contract is dependent on facts and has to be worked out in each case and on ascertainment of all aspects of the matter. It is submitted by Sri. Suryanarayana, learned counsel for the petitioner that in the instant case exercise had been undertaken and accepted by the assessing officer. 40. Therefore, we will have to necessarily proceed on such finding of fact ....
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.... judgment and would therefore submit that the supreme court also having not allowed such deductions to pass or to be permitted, the claim towards deduction in respect of interest charge, postage etc., being like or identical charges, cannot be permitted and the Commissioner has rightly revised the assessment order to disallow the deduction in respect of such charges. 43. Submission that non-examination by the Tribunal is of no consequence a once the Commissioner has taken the correct view, it is only to be taken and affirmed by the Tribunal and therefore no interference is warranted etc., is not a submission that can be accepted for the reasons that the Supreme Court had occasion to discuss the claim under item Nos. [vii] & [viii]. We may indicate that the deduction claimed towards such charges even otherwise come within the scope of clause [f] which is cost of establishment of the contractor to the extent it is relatable to supply of labour and services and also clauses [g] and [n] and at any rate are all expenses in the nature of expenses as covered under clause [f] [g] and [h] occurring at page 235 of GANNON DUNKERLEY's case [supra]. If so, it has to be inevitably allo....