TMI Blog2005 (2) TMI 793X X X X Extracts X X X X X X X X Extracts X X X X ..... 57 ( the Rules , for short), inter alia, seeking clarification/advance ruling by framing the following questions: (a) Whether the specific designing and fabrication of facade access equipment is a works contract activity falling under the provisions of section 5-B of the KST Act, 1957 and thereby determine under which specific entry, the same falls under the Sixth Schedule to the KST Act? (b) If the specific activity of the appellant is not a works contract, then to please determine under which other entry the same falls for the purpose of taxation? 3.. The Advance Ruling Authority, after hearing the representative of the appellant-company, by its clarification order No. AR. CLR.CR.73/02-03 dated May 26, 2003 has clarified that though the facade access system is made per order, the goods in question has the character of machineries and therefore, when sold, it is liable to tax as sale of machinery under entry 1(iii)(a) of Part M of the Second Schedule to the KST Act and the basic rate of tax applicable is 12 per cent and the understanding of the appellant-company that it is works contract is not correct. 4.. The appellant-company is now before this Court in this app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms and conditions mentioned in the purchase orders/work orders/invoices itself are the terms and conditions of the contract entered between the appellant-company and its customers and therefore, we intend to notice certain conditions in one or two purchase orders placed by the appellant-company's customers for fabrication, installation and supply of goods in question. 9.. The facade access system is a simple machine made to order for the purpose of window cleaning, ledges cleaning, etc. The goods in question is manufactured and supplied to the specific design and requirement of customers. The purchase order placed by the contractee in some cases is composite works contract for the design, supply and installation of equipments like parapet jib, bracket sets and single man cradle and the price payable for supply is inclusive of all taxes. In some cases, no advance amount is paid by the contractee and in some cases, 20 per cent advance is paid along with the purchase order and the balance amount requires to be paid only after erection and installation of the equipment. The appellant-company has also produced before us another type of work order placed by yet another custom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d safe performance of the system for twenty years. (b) The system designed and provided by contractor to be suitable to receive the cleaning system. (c) Pull tests for anchor bolts and any other filled tests required by the employer shall be conducted by the contractor at no extra cost. 10. The reason why we have mentioned in detail the different types of work orders that are placed for supply of facade access system by the purchasers with the appellant-company, is only to suggest that the character of a transaction is defined by the nature of the contract entered into by the parties. The nature of contract depends upon the intention of the parties as reflected in the terms and conditions of the contract document. The nature of the contract is decided on the totality of its terms and conditions, i.e., scope and obligation of the parties, contract value and payment terms, insurance coverage, transfer of ownership or title in goods supplied, liquidated damages whether restricted to supply value or not, etc. Thus, the nature of a contract is predominately based on facts rather than being a question of law. The Supreme Court in the case of Hindustan Ship Yard Ltd. v. State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he goods are sold as chattels and the work done is merely incidental to the sale. 12.. The Supreme Court in the said decision, after noticing the observations made by learned authors on Sale of Goods Act and the case laws decided by the Supreme Court on the topic at issue, has laid down the principles to distinguish between a contract for sale and contract for work and labour. It is relevant to notice the observations made by the Supreme Court therein. They are as under: 14. The principles deducible from the several decided cases may be summed up as under: (1) It is difficult to lay down any rule or inflexible rule applicable alike to all transactions so as to distinguish between a contract for sale and a contract for work and labour. (2) Transfer of property of goods for a price is the linchpin of the definition of 'sale'. Whether a particular contract is one of sale of goods or for work and labour depends upon the main object of the parties found out from an overview of the terms of the contract, the circumstances of the transactions and the custom of the trade. It is the substance of the contract document/s and not merely the form, which has to be looked in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facade access system is nothing but works contract as defined under section 2(v-i) of the Act. Since the appellant-company had some doubt in this regard and in particular to the rate of tax payable on the activity carried on by it, the appellant-company has approached the Advance Ruling Authority, to clarify whether the specific designing and fabrication of facade access system equipments is a works contract activity falling under the provisions of section 5-B of the Act and if it not so, then to inform them under which other entry the transaction falls for the purpose of taxation. 14.. The Advance Ruling Authority without even considering the nature of contract between the appellant-company and the contractee, in a most casual way, has clarified to the appellant-company that its transaction with its customers is nothing but sale of machinery and therefore, exigible to tax under entry 1(iii)(a) of Part M of the Second Schedule to the Act and the rate of tax applicable is at 12 per cent. 15.. Section 4 of the Act was inserted by Karnataka Act No. 5 of 2002, with effect from April 1, 2002. This section provides for clarification and advance rulings by an authority constituted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons for taking a particular decision. Any decision bereft of reasoning will not only be arbitrary but also be unjust and certainly would negate the concept of advance ruling , i.e., a written confirmation from the taxing authorities in advance in respect of tax implications of a proposed transaction. 16.. We do not intend to notice the other sub-sections of section 4 of the Act for the disposal of the present case. 17.. Now coming back to the impugned order, the appellantcompany by paying a hefty fee of Rs. 1,000 on the application filed before the Advance Ruling Authority has sought a clarification, firstly, whether the nature of business and manufacturing activity carried on by it would come within the definition of works contract and exigible to tax under the specific charging provision, namely, section 5-B of the Act and consequently to clarify under which specific entry under Sixth Schedule to the Act its activity could be fitted into. Secondly, if the activity of the applicant is not a works contract, then to clarify under which other entry the same falls for the purpose of taxation under the Act. The Advance Ruling Authority after hearing the representative of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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