BY TIOL NEWS SERVICE

NEW DELHI, MAR 06, 2018: THE issue before the Apex Court was whether the Section 4(1)(b) of the Karnataka Value Added Tax Act, 2003, as it existed prior to amendment in April 1, 2006, was an all-encompassing entry, providing a uniform tax rate on goods used in executing a works contract. NO is the verdict. Thereupon the Court also held that the exigibility to tax did not depend on the State government to prescribe a uniform rate of tax for goods used in executing works contracts.

Facts of the case:

The assessee-company, engaged in executing civil works contracts, is registered under the Act and the CST Act. The assessee purchased hardware, sand & bricks, falling under the Third Schedule to the Act, and also declared goods u/s 15 of the CST Act and other non-scheduled goods from within and outside the State and from unregistered dealers. On 31.01.2006, the assessee applied before the Authority for Advance Clarification and Ruling (AAR), to determine the applicable tax rate for executing civil works contracts under the Act. The AAR held that since there was no specific entry for tax rate on works contract upto 31.03.006, the tax on goods used in execution of works contract should be levied as per the tax rate applicable of the sale of goods under the KVAT Act 2003. Thereafter, the assessee sought further clarification on issues raised in the original application about the rate of tax on iron and steel used in the execution of civil works contracts. On this appication, the AAR held that the tax rate applicable on iron and steel is 4% when used in the same form, otherwise the rate of tax would be 12.5%. Later, a revision order was passed by the Commr. of Commercial Taxes, holding that the orders of the AAR were erroneous and prejudicial to the interests of the Revenue, and reasoned that there was a deemed sale in the course of the execution of a works contract by incorporation of the goods into the work. The Commr. held this to be distinct from normal sale of goods, and that 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. Thereby, the clarification given by AAR was held to be incorrect in assuming that individual goods purchased for use in the execution of a works contract were 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. Against such revision order, the assessee appealed to the High Court, which proceeded to set aside such order. Hence the Department's appeal.

On hearing the matter, the Court held that,

++ the core of the submissions which have been ably projected before the Court by the Department is that the State legislature had in fact prescribed a uniform rate for works contracts, prior to 1.4.2006 in Section 4(1)(b) under which a rate of 12.5% was provided. Herein, declared goods would be assessed separately; while the balance of the goods in a works contract would be assessed on the total turnover, which is incorporated under Rule 3(1)(c). Such submission is unacceptable. it would be far-fetched to accept that in enacting Section 4(1)(b), the legislature intended to prescribe a uniform rate of tax, prior to 1.4.2006, for goods incorporated in a works contract. The scheme legislated upon in Section 4(1) envisaged specific rates of tax on goods falling within the Second, Third and Fourth Schedules. What Section 4(1)(b) provided was a residual entry under which a rate of 12.5% was provided 'in respect of other goods'. The expression 'in respect of other goods' meant goods other than those falling in the Second, Third and Fourth Schedules. Declared goods specified in Section 14 of the Central Sales Tax Act, 1956 were comprehended in 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 a works contract become exigible to tax. Exigibiliy to tax, it is settled law, is distinct from the rate of tax and the measure of the tax.

++ the exigibility to tax is not (as it cannot be) dependent on the state prescribing a uniform rate of tax for goods involved in works contracts. That the KVAT Act 2003 did not provide a uniform rate of tax prior to 01.04.2006 on goods involved in the execution of works contract also becomes apparent when we read the amendment which introduced Section 4(1)(c) by Act 4 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 w.e.f. 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. Therefore, it cannot be said that upto 31 March 2006 Section 4(1)(b) envisaged a uniform rate for the transfer of goods involved in the execution of a works contract. Section 4 imposes the liability to pay tax on every dealer who is or is required to be registered, on his taxable turnover. The concept of taxable turnover in Section 2(34) is defined with reference to the turnover on which a dealer is liable to be taxed, determined after making deductions from the total turnover as prescribed. The concept of taxable turnover thus incorporates the expressions 'turnover' and 'total turnover', both of which are defined in Sections 2(36) and Section 2(35) respectively. The manner in which the total turnover of a dealer is computed is prescribed in Rule 3(1)(b), in the case of a normal sale, and in Rule 3(1)(c), for the purposes of a works contract. In the case of a works contract, deductions are envisaged under sub-rule (2) of Rule 3, which includes amounts such as labour and other charges. Section 7 provides that the sale of goods shall be deemed to have taken place at the time of the transfer of title or possession or incorporation of the goods in the course of the execution of a works contract.

++ in the view of this court, the interpretation placed on the provisions of the Act as they existed prior to 1.4.2006 is consistent with the plain meaning of the words used by the legislature. There is no agreement with the submission which has been urged on behalf the Department that Section 4(1)(b), as it existed prior to 1.4.2006 was a catch-all entry providing for a uniform rate of tax on goods involved in the execution of a works contract. Such a construction does not emerge from the plain meaning of the words used and is in fact belied by the need which was felt by the legislature to impose a uniform rate of tax only with effect from 1 April 2006. Before concluding, it may be clarified that the genesis of the present dispute arises out of the proceedings which were initiated before AAR by the respondent seeking guidance on the applicable rate of tax on the law as it existed until 31.03.2006. This proceeding concludes the issue of interpretation. It is clarified, by way of abundant caution, that issues of a factual nature, will fall for adjudication in the course of assessment proceedings. It was open to state legislatures to provide uniform rates of tax on goods involved in the execution of works contracts. Many state legislatures did so. The Karnataka legislature did so with effect from 1.4.2006, not earlier. Hence the appeal lacks merit.

(See 2018-TIOL-75-SC-VAT-LB)