TMI Blog2010 (6) TMI 737X X X X Extracts X X X X X X X X Extracts X X X X ..... f 2009 at annexure A thereof is hereby quashed. - Writ Petition Nos. 29932, 29933 of 2009 - - - Dated:- 30-6-2010 - ANAND BYRAREDDY, J. ORDER:- ANAND BYRAREDDY J. These petitions are heard and disposed of together having regard to the fact that the issues involved are identical. The petitioners seek to challenge the constitutional validity of section 4(1)(c) and Schedule VI, item 23 of the Karnataka Value Added Tax Act, 2003 (hereinafter referred to as, the KVAT Act , for brevity) and the Explanation appended to rule 3(1) of the Karnataka Value Added Tax Rules, 2005 (hereinafter referred to as, the KVAT Rules , for brevity). The petitioners are engaged in undertaking turnkey projects and other works contracts for third parties. The petitioners are assessed to tax under the Act, more particularly under section 39(1) of the Act. The orders of assessments made in respect of each of the petitioners were sought to be revised on the ground that the turnover offered for tax at a rate of four per cent on turnover of iron and steel, involved in the execution of works contracts, was not permissible for the reason that the works contract of civil works is a distinct e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration; (b) A tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (c) A tax on the delivery of goods on hire purchase or any system of payment by instalments; (d) A tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (e) A tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) A tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration; and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o determine the value of the goods which are involved in the execution of a works contract for the purpose of levying the tax referred to in article 366(29A)(b), it is permissible to take the value of the works contract as the basis and the value of the goods involved in the execution of the works contract can be arrived at, by deducting expenses incurred by the contractor for providing labour and other services from the value of the works contract. While fixing the rate of tax, it is permissible to fix a uniform rate of tax, for the various goods involved in the execution of a works contract, while rate may be different from the rate of tax fixed in respect of sales or purchase of those goods as a separate article. This position in law was reiterated in Builders Association of India v. State of Karnataka [1993] 88 STC 248 (SC). From a reading of the provisions of the KVAT Act, it is clear that section 3 is the main charging section which contemplates the levy of tax only on sale of goods. The rate of tax on every such sale in respect of such goods is prescribed under section 4 of the KVAT Act. It is contended that unlike under the Karnataka Sales Tax Act, 1957 (hereinaft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, which includes works contracts also. It is seen that the State can levy tax on the sale or purchase of goods by virtue of the power vested in article 246, entry 54 of List II. The expression tax on the sale or purchase of goods has been defined to include the term works contracts , while simultaneously the Constitution imposes a restriction in respect of the system of levy, rates and other incidence of tax on the sale or purchase of goods. It is contended that there is a special significance attached to the expressions includes and deemed to be a sale as employed under the provisions of the Constitution. The Supreme Court in State of Madras v. Gannon Dunkerley Co. (Madras) Ltd. [1958] 9 STC 353 (SC), which has been followed in several subsequent judgments, has expounded on the natural import of the definition of the expression tax on the sale or purchase of goods as not to be construed in its popular sense, but in its legal sense. The expression includes as employed in clause (29A) of article 366 assumes importance, since it is directed not only in respect of such things as signified according to their natural import, but includes such transfer as shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Schedule under the present Act is not acceptable in law. The levy of any higher rate of tax on the turnover of iron and steel would run counter to section 7 of the KVAT Act which specifically provides as follows: 7. (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 sub-section (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. From a reading of the above, it is clear that 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. In other words, the sale occurs at the time of incorporation of the goods in the course of execution of the work. It is hence contended that steel materially acquires the characteristics of construction work such as footings, slabs, beams, etc., only when they are made part and parcel of the immovable property, namely, the building, and when once they become im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08] 11 VST 896 (Karn) has sought to distinguish the decision in B. V. Subba Reddy's case [2008] 11 VST 715 (Karn), and has observed that the assessing authority had accepted that the steel had been used in the construction of the building without being converted into any other form. Because of this factual finding by the assessing authority, this court had held that it was a case where the goods were taxable at four per cent as being declared goods and therefore, did not lay down the law as sought to be contended by the petitioners and that even if iron and steel are sold in some other form, when they are incorporated in the works contracts, that the tax could not be levied in terms of the Sixth Schedule. It is thus contended that whether there was a transfer of declared goods as declared goods in the execution of a works contract would depend on the facts of each case to be determined by the assessing authority. In the instant cases, the assessing authority having held that the steel used in the execution of the works contract has not been transferred in the form of declared goods, but has changed its form when it is transferred and therefore, are not any longer declared go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he petitions would have to be dismissed on that ground alone. By way of reply, it is contended that the assertion that the steel used in the execution of works contracts has been transferred after converting the same into some other form is an incorrect statement. There is no such finding by the assessing authority in the present cases. In the light of which, the contention that the petitioners are not entitled to place reliance on the decision of this court in URC Construction's case [2008] 11 VST 896 (Karn) is erroneous. The petitioner in W.P. Nos. 29046 to 29048 of 2009 has also raised an additional ground, in that, it is stated that the petitioner who was engaged in the execution of a contract for the supply and installation and commissioning of manufactured bullet tanks which are later on installed at the site of the contracting party, had used mild steel plates and sheets as raw materials in the manufacture of the said products. This raw material was sought to be brought to tax at the rate of 12.5 per cent on the amounts declared by the petitioner towards the value of the same. Apart from this, certain mobilisation advances received under the terms of the contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if there is a transfer of property in declared goods for example steel products in the process of execution of works contract, the State can levy tax only at four per cent and only at one stage. The petitioner further submits that the levy of penalty under section 72(2) of the KVAT Act on the footing that the petitioner understated the tax liability in the returns filed by more than five per cent and also the levy of interest under section 36(3) of the KVAT Act is also illegal and unconstitutional being highly arbitrary and confiscatory in nature. In the light of the above rival contentions, the points that arise for consideration are: (a) Whether the State Government has the competence to levy tax on the transfer of property in goods, involved in the execution of works contract, (when the goods in question are declared goods for the purposes of the Central Sales Tax Act, 1956) at more than one stage? (b) Whether the Explanation to rule 3(1) of the KVAT Rules which provides that any advances paid to a contractor as part of the consideration for goods involved in the execution of the works contract could be included in the total turnover in the month in which the execut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract, the State can levy tax only at four per cent and only at one stage. . . As can be seen, section 4 of the Karnataka Value Added Tax Act, 2003 is the charging section and it provides as follows: 4. Liability to tax and rates thereof. (1) Every dealer who is or is required to be registered as specified in sections 22 and 24, shall be liable to pay tax, on his taxable turnover, (a) in respect of goods mentioned in, (i) Second Schedule, at the rate of one per cent, (ii) Third Schedule, at the rate of four per cent, and (iii) Fourth Schedule, at the rate of twenty per cent. (b) in respect of other goods, at the rate of twelve and one half per cent. (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. An analysis of the section more particularly, clause (c) would indicate that a dealer registered under the Act shall be liable to tax and that such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e point of time the sale of goods is completed for the purposes of this Act. It could be when payment is received as advance by a dealer; or when an invoice is raised; or when the ownership of goods is transferred, or when possession of the goods is given, or when the goods are incorporated into the property of the contractee. Therefore, steel and steel products used as raw material by the petitioners are incorporated into their civil works or other works contracts in the same form except that the same may be fashioned to suit the requirement, before the same merge into the works which is thereafter identified as immovable property. At the time of incorporation, steel and steel products do not lose their nature or form and therefore cannot be subjected to tax, as the said goods are already subjected to tax as declared goods under the CST Act. The reliance sought to be placed on the decision of this court in the case of B.V. Subba Reddy [2008] 11 VST 715 (Karn), by the Revenue, which has been followed in later decisions, also cannot be pressed into service for the same was rendered in the backdrop of there being no dispute that iron and steel that had been purchased by the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable to the dealer as the consideration for transfer of the right to use any goods for any purpose (whether or not for specified period); (e) the total amount payable to the dealer as the consideration in respect of goods delivered on hire-purchase or any system of payment by instalments; (f) the aggregate of the sale prices received and receivable by the dealer in respect of sale of any goods in the course of inter-State trade or commerce and export out of the territory of India and sale in the course of import into the territory of India; and (g) the value of all goods transferred or despatched outside the State otherwise than by way of sale. Explanation. Any amount paid as advance to a dealer as a part of consideration for transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract shall be included in his total turnover in the month in which execution of such works contract commences. The Explanation above was inserted by a notification dated May 27, 2006 which requires a registered dealer to include the advance amounts received as part of total turnover in the month in which the execution of works c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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