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CIVIL APPEAL NO 811 OF 2018
(Arising out of SLP(C) No 27048 of 2013)
STATE OF KARNATAKA AND ANR ..Appellants
(Arising out of SLP(C )Nos 10570-10575 of 2015)
JUDGMENT
CIVIL APPEAL NO 811 OF 2018:
(Arising out of SLP(C) No 27048 of 2013)
1 The State of Karnataka is in appeal from a judgment of a Division Bench of the High Court dated 28 September 2012. 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’). REPORTABLE 2018 INSC 205
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 nonscheduled 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: “…correctly understood that there is no specific entry providing rate of tax on works contract under KVAT Act, up to 31-3-2006 and therefore, tax should be levied as per the rate applicable on the value of each class of goods involved in the execution of works contract. Therefore, as regards the rate of tax on the deemed sales of goods involved in the execution of works contract, it is to be clarified that tax is payable at the rate applicable to the Sale of Goods Act upto 31.03.2006. And by KVAT (Amendment) Act, 2006, Clause (c ) has been got inserted to section 4(1) w.e.f. 1.4.2006, for levy of tax in respect of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, and appending VI Schedule to the Act, listing out the items/descriptions of the works contract with the rate of tax corresponding to them. As per entry 23 of the said schedule, “all other work contracts not specified in any of the above categories including composite contracts with one or more of the above categories” are liable to tax @ 12.5% w.e.f. 01.04.2006. The civil works contract falls under the said entry and therefore, is liable to tax @ 12.5% only. Hence, it is clarified accordingly.”
3 The dealer sought a further clarification on the issues that were raised in the original application about the rate of tax on iron and steel used in the execution of civil works contracts. By its ruling dated 7 December 2006, AAR held that the rate of tax applicable on iron and steel is 4 per cent when used in the same form, otherwise the rate of tax would be 12.[5] per cent.
4 Subsequently, an order was passed in revision by the Commissioner of Commercial Taxes (Karnataka), Bangalore, holding that the orders of AAR were erroneous and prejudicial to the interests of the revenue. According to the Commissioner, there is a deemed sale in the course of the execution of a works contract by incorporation of the goods into the work. This is distinct from a normal sale of goods. In the case of a works contract, it is a conglomerate of goods that is transferred and there is no sale of individual goods. According to the Commissioner, both before and after the amendment of Section 4(1)(c) with effect from 1 April 2006, tax is levied on the taxable turnover of goods involved in the execution of a works contract. Taxable turnover in a works contract 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 goods and materials. The property in the goods used in the works contract will be deemed to have been passed over to the buyer as soon as the goods or material used are incorporated to the moveable property by principle of accretion to the moveable property. Hence, we are of the view that the order passed by the Commissioner is contrary to law. For the period prior to 1-4-2006, tax has to be levied as per Section 3(1) of the Act and for the period subsequent to 1-4-2006, tax has to be levied as per Section 4(1)(c ) of the Act. Hence, the substantial questions of law are held in favour of the appellant.”
6 The submission which has been urged on behalf of the State is that although Section 4(1)(c) was introduced with effect from 1 April 2006, all other provisions in relation to works contracts existed since the inception of the Act in 2003. The definitions of sale (Section 2(29)), goods (Section 2(15)), turnover (Section 2(36)), total turnover (Section 2(35)) and taxable turnover (Section 2(34)) were a part of the parent legislation. The distinct mechanism for determination of total turnover in respect of a normal sale and deemed sale was also in existence prior to 1 April
2006. Consequently, it has been urged on behalf of the State by Mr Devadatt Kamat, that:
(i) There cannot be any dispute that the KVAT Act envisaged a levy of tax on works contracts even prior to 01.04.2006;
(ii) The rate of tax for works contracts prior to 01.04.2006 would fall under
Section 4(1)(b), the residual entry. The residual entry prescribes the rate of tax for “other goods”, that is, goods which are not specified under any of the schedules. The goods incorporated in a works contract also come within the ambit of the definition of goods under Section 2(15);
(iii) In a deemed sale, the conglomerate of the goods or the value of the contract is to be taken as the amount of goods which are sold. This is specifically incorporated in Rule 3(c);
(iv) In case of a deemed sale, the concept of ‘total turnover’ is the total amount of consideration for the transfer of property in the goods and the same is in contradistinction to the concept of ‘total turnover’ in respect of a normal sale where it is the value of each goods;
(v) The argument that prior to 01.04.2006 the rate of tax has to be levied on the individual goods comprised in the works contract would militate against the express 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-writing the statute, which is against the settled cannon of interpretation that in a taxing statute nothing can be read in. [Bansal Wire Industries Ltd. V State of Uttar Pradesh, (2011) 6 SCC 545].
7 On the other hand, Mr SK Bagaria, learned senior counsel appearing on behalf of the respondent supports the reasoning of the High Court on the following grounds:
(i) In the judgment of the Court in Gannon Dunkerly & Co v State of
Rajasthan[1], it was held that the State legislatures may tax the goods involved in execution of a works contract at a uniform rate, which is different from the rates applicable to individual goods;
(ii) The KVAT Act was enacted in 2003 and its charging section (Section 3) came into force on 1 May 2005. Though in Gannon Dunkerly & Co (supra), this Court permitted State legislatures to tax goods involved in the execution of works contracts at a uniform rate, the legislature of Karnataka did not do so. No provision existed for a uniform rate on all goods involved in the execution of works contracts until 31 March 2006;
(iii) The above position was altered when Section 4 was amended with effect from
1 April 2006 by Act 4 of 2006. As a result, in terms of clause (c), subject to sections 14 and 15 of the CST Act, goods involved in the execution of works contracts are liable to a uniform rate of tax, depending upon the description of the works contract in the Sixth Schedule;
(iv) In so far as declared goods are concerned, Section 4(1)(a) (ii) provided for a rate of 4% on goods mentioned in the Third Schedule.
┌────────────────────────────────────────────────────────────────────────────────────────┐ │ Serial No.20 of the Third Schedule to the KVAT Act 2003 and attracted a rate of │ │ 4%, which applied to goods in that Schedule. As a result of the deeming definition │ │ of the expression sale, a transfer of property in goods involved in the execution of │ └────────────────────────────────────────────────────────────────────────────────────────┘
CIVIL APPEAL NOS 812-817 OF 2018: (Arising out of SLP(C )Nos 10570-10575 of 2015)
18 The High Court, by its impugned judgment and order dated 25 September 2014 dismissed the Sales Tax Revision Petitions filed under Section 65(1) of the Karnataka Value Added Tax Act 2003 against the order dated 26 August 2013 of the Karnataka Appellate Tribunal, Bengaluru. While dismissing the revisions, the High Court relied upon its earlier decision dated 29 September 2012 in M/s Durga Projects Inc v State of Karnataka (STA 72 of 2010). The appeal filed by the State of Karnataka (Civil Appeal No.811 of 2018) in the matter of M/s Durga Projects Inc. has been dismissed by this Court. No separate submission has been raised in the present appeals. The appeals are, accordingly, dismissed. There shall be no order as to costs............................................CJI [DIPAK MISRA]...........................................J [A M KHANWILKAR]...........................................J [Dr D Y CHANDRACHUD] New Delhi; March 06, 2018