By TIOL News Service

NEW DELHI, AUG 12, 2016: THIS group of appeals concerns the rate of taxability of declared goods - i.e. goods declared to be of special importance under Section 14 of the Central Sales Tax Act, 1956. The question that has to be answered in these appeals is whether iron and steel reinforcements of cement concrete that are used in buildings lose their character as iron and steel at the point of taxability, that is, at the point of accretion in a works contract. All these appeals come from the State of Karnataka and can be divided into two groups - one group relatable to the provisions of the Karnataka Sales Tax Act, 1957 and post 1.4.2005, appeals that are relatable to the Karnataka Value Added Tax Act, 2003. The facts in these appeals are more or less similar. Iron and Steel products are used in the execution of works contracts for reinforcement of cement, the iron and steel products becoming part of pillars, beams, roofs, etc. which are all parts of the ultimate immovable structure that is the building or other structure to be constructed.

According to the counsel for the assessees, the present matter is concluded by two judgments of the Supreme Court, namely, Builders' Assn. of India v. Union of India - 2002-TIOL-602-SC-CT-CB, and Gannon Dunkerley and Co. v. State of Rajasthan, - 2002-TIOL-103-SC-CT-CB. The detailed judgment dated 10.12.2003 correctly extracts all the relevant passages from the aforesaid judgments to reach the conclusion that under the Karnataka Value Added Tax Act, 2003, the iron and steel products that are reinforced for cement concrete used in buildings and structures, remains exactly the same goods at the point of taxability - that is, the point of accretion, and that mere cutting into different shapes and bending does not make these items lose their identity as declared goods. Therefore, according to the counsel, only tax at the rate of 4% can be levied, and not the higher rate levied in respect of civil construction works generally. It cannot be said that the identity of the iron and steel goods had changed at the point of taxability, and they cited several judgments to show that mere cutting and shaping of these products would not amount to "manufacture" and hence the very goods that were declared goods alone were taxable at the rate of 4%, both under the Karnataka Sales Tax Act as well as the Karnataka Value Added Tax Act, 2003.

The senior advocate appearing on behalf of the State, relied strongly on State of Tamil Nadu v. M/s. Pyare Lal Malhotra and Others in order to buttress his submission that the iron and steel products did not continue as iron and steel products but somehow became different goods at the point of accretion and that, therefore, they could be taxed at the higher rate applicable to civil constructions generally. He did not dispute the law laid down in the two Supreme Court judgments, and very fairly submitted that if the iron and steel products continued as declared goods then even though they were in a works contract they were subject to the drill of Section 15 of the Central Sales Tax Act, and would therefore be chargeable at 4% if it were found that the said products continue to remain the same.

Having heard learned counsel for the parties, the Supreme Court is of the opinion that the assessee's counsel is right. The matter is no longer res integra. Two important propositions emerge on a conjoint reading of Builders Association and M/s. Gannon Dunkerley.

- First, that works contracts that are liable to be taxed after the 46th Constitution Amendment are subject to the drill of Article 286(3) read with Section 15 of the Central Sales Tax Act, namely, that they are chargeable at a single point and at a rate not exceeding 4% at the relevant time.

- Further, the point at which these iron and steel products are taxable is the point of accretion, that is, the point of incorporation into the building or structure.

(See 2016-TIOL-120-SC-VAT)