TaxTMI 
TaxTMI 
TaxTMI 
2018 (3) TMI 162
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....The issue before the High Court related to the rate of tax applicable to works contracts prior to 1 April 2006 when Section 4(1)(c) was introduced by an amendment into the Karnataka Value Added Tax Act 2003 ('KVAT Act 2003'). 2 The respondent is engaged in executing civil works contacts and is registered both under the KVAT Act and the Central Sales Tax Act. It purchases building materials like hardware, sand and bricks falling under the Third Schedule to the KVAT Act, declared goods under Section 15 of the CST Act and other non-scheduled goods from within and outside the State and from unregistered dealers. On 31 January 2006 it made an application before the Authority for Advance Clarification and Ruling ('AAR') for guidance on the rate of tax applicable for the execution of civil works contracts under the KVAT Act. The AAR held by its order dated 2 August 2006 that since there was no specific entry providing for the rate of tax on works contracts up to 31 March 2006, tax on goods used in the execution of works contract should be levied in accordance with the rate of tax applicable to the sale of goods under the KVAT Act 2003. The relevant part of the order is extracted below: ....
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....is determined after allowing deductions from the total consideration admissible under Rule 3(2) of the KVAT Rules 2005. On the other hand, in the case of a normal sale of goods, the aggregate sale price paid for a particular commodity constitutes the taxable turnover. The clarification by AAR was held to be in error in assuming that individual goods purchased for use in the execution of a works contract are transferred in the same form and in ruling that the rates of tax on taxable turnover would be the rates applicable to each of the goods purchased. The matter was kept open to be addressed by the assessing authorities in accordance with law. 5 The dealer preferred a sales tax appeal before the High Court of Karnataka, aggrieved by the revisional order of the Commissioner of Commercial Taxes. By its judgment dated 28 September 2012, the High Court allowed the appeal and while setting aside the order in revision held as follows: "The sale under the works contract is a deemed sale of transfer of the goods alone and it is not different from the normal sale. Hence, the tax has to be levied on the price of the goods and material used in the works contract as if there was a sale of g....
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....ress provisions of the Act and the Rules in force which categorically lay down a distinct procedure for computation of the rate of tax in respect of works contracts [Rule 3(1)(c) read with Section 4(1), 2(34), 2(35) and 2(36)]; (vi) The contention that the tax is leviable on individual goods in a works contract will render the entire scheme of the Act prior to 01.04.2006 unworkable and would amount to abolishing the levy on works contracts prior to 01.04.2006; (vii) The arguments of the Respondent would effectively render Section 2(29) read with Rule 3(1)(c) completely redundant and otiose. The taxable event in a deemed sale (See Section 7) is the time of incorporation of the goods in the course of execution of the works contract. Therefore, to relegate the determination of the rate of taxation to a period anterior to the taxable event would render the entire scheme of taxation under the KVAT Act otiose; and (viii) It is well settled that there is a presumption against redundancy of a statutory provision [Balabhagas Hulaschand v State of Orissa, (1976) 2 SCC 44]. Furthermore, the suggestion that individual goods are to be taxed separately in a works contract amounts to re-wri....
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....cerned, as stated above, Section 4(1) of the KVAT Act as it stood during the relevant period i.e. upto 31.03.2006 specifically provided for the applicable rates as under: (a) In respect of declared goods as specified in Section 14 of the CST Act @4% (Section 4(1)(a)(ii) read with Serial No.20 of Third Schedule); (b) In respect of the goods mentioned in the Second, Third or Fourth Schedules at the respective rates mentioned in Section 4(1)(a) read with the said Schedules; (c) In respect of other goods, i.e. goods not covered by Section 4(1)(a), @ 12.5% under Section 4(1)(b). At that time i.e. upto 31.03.2006, there was no provision in the KVAT Act providing for a uniform rate in respect of goods supplied in execution of a works contract. In so far as the expression "other goods" in Section 4(1)(b) is concerned, it only meant and covered the goods other than those covered by Section 4(1)(a). The goods mentioned in the Second, Third or Fourth Schedules (in this case particularly iron and steel covered by Serial No.20 of Third Schedule) were specifically covered by the said Schedules and there could be no scope to consign these specific goods covered by the said Schedules to th....
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....te an analysis of the submissions which have been urged on behalf of the State in appeal, it would be necessary to advert to the provisions of the KVAT Act 2003 prior to 1 April 2006 bearing on the controversy. 1 April 2006 assumes significance because by Karnataka Act 4 of 2006, clause (c) was introduced into Section 4(1) so as to incorporate a specific rate of tax on the transfer of property involved in the execution of works contracts. The rate of tax came to be specified for works contracts of various descriptions in the Sixth Schedule. But even before 1 April 2006, as our analysis would indicate, there is no manner of doubt that works contracts were exigible to the levy of tax under the KVAT Act 2003. 10 Section 3 of the Act is the charging provision and provides as follows: "3. Levy of tax.- (1) The tax shall be levied on every sale of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of this Act. (2) The tax shall also be levied, and paid by every registered dealer or a dealer liable to be registered, on the sale of taxable goods to him, for use in the course of his business, by a person who is not registere....
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....le, at the rate of twenty per cent. (b) in respect of other goods, at the rate of twelve and one half per cent." By Karnataka Act 4 of 2006, clause (c) was introduced into Section 4(1). Clause (c) reads thus: "(c) in respect of transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract specified in column (2) of the Sixth Schedule, subject to Sections 14 and 15 of the Central Sales Tax Act, 1956 (Central Act 74 of 1956), at the rates specified in the corresponding entries in column (3) of the said Schedule." Section 4 sets out the liability of every dealer to pay tax on his taxable turnover. The expression 'taxable turnover' is defined in Section 2(34) which reads thus : "(34) 'Taxable turnover' means the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total turnover and in such manner as may be prescribed, but shall not include the turnover of purchase or sale in the course of interstate trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India and the value of goo....
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....on 7 provides when the sale of goods is deemed to take place: "7. Time of sale of goods.- (1) Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act 3 of 1930), for the purpose of this Act, and subject to subsection (2), the sale of goods shall be deemed to have taken place at the time of transfer of title or possession or incorporation of the goods in the course of execution of any works contract whether or not there is receipt of payment: Provided that where a dealer issues a tax invoice in respect of such sale within fourteen days from the date of the sale, the sale shall be deemed to have taken place at the time the invoice is issued." Hence, in the case of a works contract, the sale of goods takes place at the time of the incorporation of the goods in the course of its execution. 11 The rules framed under the KVAT Act 2003 - the KVAT Rules 2005 - provide for the determination of total turnover. In the case of a normal sale, the total turnover is provided for in Rule 3(1)(b). The total turnover in the case of a works contact is defined in Rule 3(1)(c). Rule 3(1), insofar as is material, provided as follows: "PART II TURNOVER REGISTRATION AND PAYMEN....
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....rks contract; (m) Such amounts calculated at the rate specified in column (3) of the Table below towards labour charges and other like charges as incurred in the execution of a works contract when such charges are not ascertainable from the books of accounts maintained by a dealer." The table below clause (m) specifies types of contracts and alongside, labour and like charges as a percentage of the value of the contract. The principle is that expenditure on account of labour charges involved in the execution of works contracts is excluded from the total turnover in order to arrive at the taxable turnover. The liability to pay tax under Section 4 is on the taxable turnover. 13 The dispute in the present case relates to 2005-06. The case relates to the position of law in the State of Karnataka, as it stood until 31 March 2006. There can be no manner of doubt that even prior to 1 April 2006 works contracts were exigible to the levy of tax. The charging section, Section 3, mandates that "the tax shall be levied on every sale of goods". The expression 'sale' in Section 2(29) means 'every transfer of the property in goods' including 'a transfer of property in goods (whether as goods....
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....(a), recourse to the residual provisions of Section 4(1)(b) would not be available. To allow a residual provision to consume the specific would be to invert the intent of the legislature. The state wants us to do just that. 15 In Gannon Dunkerly & Co (supra), this Court held that it is permissible for the State legislatures to prescribe a uniform rate of tax for all goods involved in the execution of works contracts, even though different rates of tax are prescribed for the sale of such goods. This followed upon the insertion of Article 366(29A)(b). In the opinion of this Court: "... it would be permissible for the State Legislature to tax all the goods involved in the execution of a works contract at a uniform rate which may be different from the rates applicable to individual goods because the goods which are involved in the execution of a works contract when incorporated in the works can be classified into a separate category for the purpose of imposing the tax and a uniform rate may be prescribed for sale of such goods". The rationale underlying this principle is that goods involved in the execution of a works contract can be classified into a separate category, so as to pr....
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....of 2006. As a result of the amendment, the legislature provided that the rate of tax in respect of the transfer of property in goods involved in the execution of a works contract would be as provided in the Sixth Schedule. The Sixth Schedule elucidates works contracts of various descriptions and elucidates the associated rates of tax for each distinct category. For declared goods, Section 4(1)(c ) is expressly subject to Sections 14 and 15 of the CST Act 1956. Hence declared goods involved in the execution of a works contract are taxable at the rates mentioned in Section 15 of the CST Act while all other goods involved in the execution of a works contract are taxable at the rate prescribed in the Sixth Schedule upon the amendment. The amendment introducing Section 4(1)(c) took effect on 1 April 2006. The amendment is not clarificatory. It was with effect from 1 April 2006 that the State legislature mandated a uniform rate of tax on goods involved in the execution of works contracts as provided in the Sixth Schedule. The position as it existed upto 31 March 2006 was altered with effect from 1 April 2006. We are, therefore, unable to accept the submission of the State that upto 31 Ma....