By TIOL News Service

KOCHI, JUNE 02, 2014: THE issues before the Bench are - Whether when the assessee buys materials from a neighbouring State for completing a works contract and discharges CST on the same, the payer for which contract was executed, is liable under the Kerala VAT Act to deduct local VAT at source and Whether the assessee is under obligation to take registration with the local VAT for such a transaction. And the answers go against the Revenue.

Facts of the case

The appellant received a work order from Indian Institute of Management, Kozhikode (IIMK) in August 2011 for setting up of the Business History Museum at their campus. Appellant procured the materials for undertaking the contract from Bangalore either directly or through sub contractors, the same was brought to Kozhikode where the work was completed. According to the appellant, the transaction involved inter state works contract liable to tax under the Central Sales Tax Act. But the IIMK informed the appellant that they will be deducting VAT at source before making payment. Appellant, therefore, filed an application seeking clarification under Section 94 of the Kerala Value Added Tax Act, 2003 before the Commissioner of Commercial Taxes. In the meantime, IIMK had deducted tax at source and offered to remit the same to the Taxation Department.

Writ petition was filed before this Court as W.P.C. No.22750/2012 and the same was disposed of with a direction to the respondent to pass appropriate orders in the clarification application. Orders came to passed stating that the transaction involved was not an inter State works contract and therefore TDS was liable to be deducted under the Act and that the appellant had to take registration under the Act as well.

Challenging this order the appellant contended that when the goods were procured from Bangalore and brought to Kozhikode for execution of work at Kozhikode, it amounted to inter state movement of goods. Hence the question of the Act being applicable did not arise. It was argued by the counsel for the appellant, based on the judgment of the Supreme Court in M/s. Hyderabad Engineering Industries v. State of Andhra Pradesh 2011-TIOL-27-SC-CT, that when the transaction involved was inter state sales it was only taxable under the Central Sales Tax Act, 1956 ('C5T Act'). On the other hand, the Government Pleader, supporting the stand taken in the impugned order, contended that there was no material to arrive at the conclusion that the transaction involved was inter state works contract and that apart, even in respect of a contractor who carried on work within the state, he was liable to get registration under the Act.

Held that,

++ the short issue involved in this appeal was with reference to the contract undertaken by the appellant. The agreement in relation to the work is Annexure B. The respondent, in the impugned order, highlights the fact that, with reference to the question regarding inter state sale, the law requires that tax should he levied and collected by the State from which the movement of goods commences. Having found so, after relying upon various judgments of the Apex Court and other High Courts, the respondent forms an opinion that the agreement decides as to from where the Contractor must procure the material. It is further found that when the Contractor procures materials from Karnataka and it is only the decision of the Contractor and the materials reveal the sale of goods to IIMK in the State of Kerala. Reference is also made to the judgment of this Court in State of Kerala v. Unitech Machines Ltd. [(2011) 19 KTR 354 (Ker)]. Therefore, it was held that if the movement started from another State to this State and it is not in pursuance of an agreement, the tax liability at the tax situs cannot be excluded. Hence, it was held that the impugned transaction does not amount to an inter state works contract and it will attract tax under the Act. Further, it is found that IIMK is liable to make tax deduction at source under Section 10 of the Act and the Appellant is liable to take registration under the Act;

++ the counsel for the appellant made specific reference to the judgment in Hyderabad Engineering in order to contend that the said opinion expressed by the Commissioner is absolutely wrong. The issue involved in the said case was whether the sale or purchase of goods can be said to have taken place in the course of inter state trade or commerce and exigible to tax under the CST Act. It is found that in order to make a sale as one in the course of inter-state trade or commerce, there must be an obligation on the seller or buyer to transport the goods outside the State. The obligation may arise by reason of Statute, contract between the parties or from mutual understanding or agreement between them or even from the nature of transaction which linked the sale to such transportation and such an obligation may be imposed, expressed by the Contractor itself or impliedly by a mutual understanding. It is further held that

"it is not necessary that in cases, there must be pieces of direct evidences showing such obligation in a written contract or oral agreement. Such obligations are inferable from circumstantial evidence."

++ in the light of such findings, when there is factual material available to show that the goods were purchased from Karnataka and brought to Kozhikode (Kerala) for the purpose of the works contract, it is a clear incident of CST Act becoming applicable and once the dealer has suffered the liability to pay tax under the CST Act, it is not known as to how a different view is possible. Therefore, we are of the view that in the light of the judgment in Hyderabad Engineering, the opinion expressed by the Commissioner is absolutely baseless;

++ in the result, this appeal is allowed. The impugned order is set aside and it is clarified that the appellant has no obligation to pay any tax under the Act and he is not liable to take registration under the Act. Needless to state that there is no obligation on the part on IIMK to deduct tax at source as the Act has no application to the contract in question. If the amount is already remitted by IIMK to the department, it shall be open for the appellant to seek necessary remedy to get refund.

(See 2014-TIOL-882-HC-KERALA-VAT)