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2016 (8) TMI 636 - SUPREME COURT

2016 (8) TMI 636 - SUPREME COURT - TMI - Works contract - inter-state sale - the point at which iron & steel products are taxable - the point of incorporation into the building or structure or otherwise - 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. - Held th .....

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l goods used therein - inter-state sale - Held that:- the High Courtís judgment is correct and does not need to be interfered with inasmuch as the iron and steel goods, after being purchased, are used in the manufacture of other goods, namely, doors, window frames, grills, etc. which in turn are used in the execution of works contracts and are therefore not exempt from tax. - Decided against the assessee. - Civil Appeal No. 4149 of 2007 - Dated:- 11-8-2016 - A. K. Sikri And R. F. Nariman, JJ. Fo .....

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Mr. Aditya Bhattacharya, Adv. Mr. L. Charanya, Adv. Mr. Raghavendra S. Srivatsa, Adv. Mr. K. V. Thirumalesh, Adv. Mr. Vikas Upadhyay, Adv. Ms. Kanupriya Bhargawa, Adv. Mr. Sandeep Singh, Adv. Mr. Shekhar G. Devasa, Adv. Mr. Manish Tiwari, Adv. Mr. Anup Kumar, Adv. Mr. V. N. Raghupathy, Adv. M/s. Nuli & Nuli Mr. Vikas Mehta, Adv. CIVIL APPEAL NO.4318 OF 2007 CIVIL APPEAL NO.4319 OF 2007 CIVIL APPEAL NO. 7400 OF 2016 (ARISING OUT OF SLP(CIVIL) NO.15253 OF 2015) CIVIL APPEAL NOS. 7401-7872 OF .....

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d 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. Ir .....

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4. Article 286(3) of the Constitution reads as follows:- Article 286. Restrictions as to imposition of tax on the sale or purchase of goods xx xx xx (3) Any law of a State shall, in so far as it imposes, or authorises the imposition of, (a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter State trade or commerce; or (b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub clause (b), sub clause (c) or sub cl .....

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iron and steel, that is to say,- (i) [pig iron, sponge iron and] cast iron including [ingot moulds, bottom plates], iron scrap, cost iron scrap, runner scrap and iron skull scrap; (ii) Steel semis (ingots, slabs, blooms and billets of all qualities, shapes and sizes); (iii) Skelp bars, tin bars, sheet bars, hoe-bar and sleeper bars; (iv) Steel bars, rounds, rods, squares, flat, octagons and hexagons, plain and ribbed or twisted, in coil form as well as straight lengths; (v) steel structurals (an .....

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forms including steel skull, turnings and borings; (xi) Steel tubes, both welded and seamless, of all diameters and lengths including tube fittings; (xii) Tin-plates, both hot dipped and electrolytic and tin free plates; (xiii) Fist plate bars, bearing plate bars, crossing sleeper bars, fish plates, bearing plates, crossing sleepers and pressed steel sleepers-heavy and light crane rails; (xiv) Wheels, tyres, axles and wheels sets; (xv) Wire rods and wires-rolled, drawn, galvanized, aluminized, t .....

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se of such goods inside the State shall not exceed [five per cent.] of the sale or purchase price thereof [***]; 6. By the 46th Amendment of the Constitution, Article 366 (29A) was added, by which it became possible by a deeming fiction to tax sale of goods involved in a works contract. Declared goods were taxable under Section 5(4) of the Act, which is set out hereunder: Section 5(4) Notwithstanding anything contained in sub-section (1) or Section 5-B or Section 5-C a tax under this Act shall b .....

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n 5-B was inserted in the Karnataka Sales Tax Act, 1957. This Section reads as follows:- Section 5-B: Levy of tax on transfer of property in goods (whether as goods or in some other forms) involved in the execution of works contracts. Notwithstanding anything contained in sub-section (1) or sub-section (3) or sub-section (3-C) of Section 5, but subject to sub-section (4), (5) or (6) of the said Section, every dealer shall pay for each year, a tax under this Act on his taxable turnover of transfe .....

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cable Rate of tax 1 2 3 4 5 2. Iron and steel, that is to say,- [(a)] (i) pig iron and cast iron including ingot moulds, bottom plates - do- From 1-11-82 4% (ii) steel semis (ingots, slabs, blooms and billets of all qualities, shapes and sizes) -do- From 15-7-75 4% (iii) skelp bars, tin bars, sheet bars, hoe-bars and sleeper bars; (iv) steel bars (rounds, rods, squares, flats, octagon and hexagons, plain and ribbed or twisted, in coil form as well as straight lengths); (v) steel structurals (ang .....

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ct. (ix) tool, alloy and special steels of any of the above categories; Act 30 of 1975 (15-7-75 to 31-10-82) (x) steel melting scrap in skull turnings and borings; -do 15.7.75 to 31.10.82 4% 8. Similarly, the Sixth Schedule, which is to be read with Section 5-B, insofar as it is relevant, reads as under:- Sl. No. Description of works Contact period for applicable which Rate of Tax 1 2 3 4 6. Civil works like construction of building, bridges, roads, etc 1-4-86 to 31-3-95 Five per cent . 1-4-95 t .....

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specified in serial number 30 and five per cent in respect of other goods, and (iii) Fourth Schedule, at the rate of twenty per cent. (b) in respect of.- (i) cigarettes, cigars, gutkha and other manufactured tobacco at the rate of fifteen per cent; (ii) other goods at the rate of thirteen 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 .....

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one half per cent 10. We have in the main to deal with the impugned judgment dated 1.9.2006 in Civil Appeal No.4318 of 2007, and judgment dated 12.8.2004 in Civil Appeal No. 4149 of 2007 in favour of Revenue, and a detailed impugned judgment which is challenged by the State of Karnataka dated 10.12.2013 in State of Karnataka and etc. etc. v. M/s. Reddy Structures Pvt. Ltd. and etc. etc. in Civil Appeals arising out of SLP (Civil) Nos.18646-19117/2015. 11. Shri N. Venkatraman led the arguments on .....

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taka 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 learned counsel, only tax at the rate of 4% can be levied, and not the higher rate levied in respect of civil construction works .....

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dded Tax Act, 2003. 12. Shri K.N. Bhat, learned senior advocate appearing on behalf of the State, relied strongly on State of Tamil Nadu v. M/s. Pyare Lal Malhotra and Others, (1976) 1 SCC 834, 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 .....

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t. The matter is no longer res integra. Two important propositions emerge on a conjoint reading of Builders Association and M/s. Gannon Dunkerley (supra). 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 prod .....

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se (a) of clause (3) of Article 286 of the Constitution and the transfers and deliveries that take place under sub-clauses (b), (c) and (d) of clause (29-A) of Article 366 of the Constitution are subject to an additional restriction mentioned in sub-clause (b) of Article 286(3) of the Constitution. [para 32] In Benjamin's Sale of Goods (3rd Edn.) in para 43 at p. 36 it is stated thus: Chattel to be affixed to land or another chattel.- Where work is to be done on the land of the employer or o .....

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riation made under it. In view of the foregoing statements with regard to the passing of the property in goods which are involved in works contract and the legal fiction created by clause (29-A) of Article 366 of the Constitution it is difficult to agree with the contention of the States that the properties that are transferred to the owner in the execution of a works contract are not the goods involved in the execution of the works contract, but a conglomerate, that is the entire building that .....

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h Amendment the Constitution had conferred on the States a larger freedom than what they had before in regard to their power to levy sales tax under entry 54 of the State List. The 46th Amendment does no more than making it possible for the States to levy sales tax on the price of goods and materials used in works contracts as if there was a sale of such goods and materials. We do not accept the argument that sub-clause (b) of Article 366(29-A) should be read as being equivalent to a separate en .....

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AIR 1955 SC 661 : (1955) 2 SCR 603 : (1955) 6 STC 446] in which this Court has held that the operative provisions of the several parts of Article 286 which imposes restrictions on the levy of sales tax by the States are intended to deal with different topics and one could not be projected or read into another and each one of them has to be obeyed while any sale or purchase is taxed under entry 54 of the State List. We, therefore, declare that sales tax laws passed by the legislatures of States l .....

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ntracts . Whatever might be the situational differences of individual cases, the constitutional limitations on the taxing power of the State as are applicable to works contracts represented by building contracts in the context of the expanded concept of tax on the sale or purchase of goods as constitutionally defined under Article 366(29-A), would equally apply to other species of works contracts with the requisite situational modifications. (Paras 38-41) In M/s. Gannon Dunkerley (supra), this C .....

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inter-State trade or commerce, or (b) to taxes of the nature referred to in sub-clauses (b), (c) and (d) of clause (29-A) of Article 366. When such a law is enacted by Parliament the legislative power of the States under Entry 54 in State List has to be exercised subject to the restrictions and conditions specified in that law. In exercise of the power conferred by Article 286(3) (a) Parliament has enacted Sections 14 and 15 of the Central Sales Tax Act, 1956. No law has, however, been made by .....

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nter-State trade or commerce. So also it is not permissible for the State Legislature to impose a tax on goods declared to be of special importance in inter-State trade or commerce under Section 14 of the Central Sales Tax Act except in accordance with the restrictions and conditions contained in Section 15 of the Central Sales Tax Act. Since the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes .....

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can be included in the measure for levy of tax. Incorporation of the goods in the works forms part of the contract relating to work and labour which is distinct from the contract for transfer of property in goods and, therefore, the cost of incorporation of the goods in the works cannot be made a part of the measure for levy of tax contemplated by Article 366(29-A)(b). [paras 31, 37, 41 and 45] 15. At this juncture, it is important to note the fact situation in a typical case before us. The Kar .....

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span. The diameters of such main reinforcement rods/bars and the distance between any two main reinforcement bars/rods is calculated depending on the required loads to be carried by the reinforced cement concrete structure to be built based on various engineering parameters. At right angles to the main reinforcement bas/rods, distribution bars/rods of appropriate lesser diameters are placed and the intersections between the distribution bars/rods and main reinforcement bars/rods are tied togeth .....

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besides welding reduces the cross section of the bars/ rods weakening their tensile strength. The reinforcements are placed and tied together in appropriate locations in accordance with the detailed principles and drawings found in standard bar bending schedules which lay down the exact parameters of interspaces between bars/ rods, the required diameters of the steel reinforcement bars/ rods and contain the required engineering drawings for placement of bars in a particular manner. The placemen .....

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the aforesaid findings relating to placement and binding together of steel reinforcement bars/ rods before such bars/ rods are embedded in cement concrete mixtures. In another case in STA No.1328/2008 decided by this Tribunal on 10.2.2009 (in the case of Sri J. Bhaskar Rao) which is relied on by the appellant, in the agreement between the Government of Karnataka, Minor Irrigation Department and the said appellant (who was a civil contractor engaged in the civil construction activity), specifica .....

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e accurately placed in exact position shown on the drawings and shall be securely held in position during placing of concrete by annealed binding wire not less than 1mm. in size and conforming to IS;280, and by using stays, blocks or metal chairs, spacers, metal hangers, supporting wires or other approved devices at sufficiently close intervals. Bars will not be allowed to end between supports not displaced during concreting or any other operation over the work …. As far as possible, bars .....

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The above specification which are standard for all civil construction works also confirms the correctness of the findings recorded by us supra. Welding of bars/ rods reduces their cross section and to that extent decreases the tensile strength of the reinforcement bars/ rods defeating the very purpose of steel reinforcement in cement concrete. When bars/ rods are just joined together loosely by the use of binding wires, the elasticity of the steel bar/ rod is in no way hampered and each reinfor .....

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tures. The findings of the lower authorities to the contrary effect in the cases on hand are entirely opposed to facts. The only process to which the steel reinforcement rods/ bars are subjected to before being embedded with cement concrete mixture is bending at its ends after cutting of steel rods/ bars to the required size and tying them at the intersections with binding wire. None of these processes constitute a manufacturing process and no new commodity is produced before incorporation into .....

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ange of form or shape or character of goods made out of them . This is the very unusual meaning which the respondents would like us to adopt. If that was the meaning, sales tax law itself would undergo a change from being a law which normally taxes sales of goods to a law which taxes sales of substances, out of which goods are made. We, however, prefer the more natural and normal interpretation which follows plainly from the fact of separate specification and numbering of each item. This means t .....

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when it was sold as a separate commercial commodity, would make no difference for purposes of the law of sales tax. The object appears to us to be to tax sales of goods of each variety and not the sale of the substance out of which they are made. As we all know, sales tax law is intended to tax sales of different commercial commodities and not to tax the production or manufacture of particular substances out of which these commodities may have been made. As soon as separate commercial commoditi .....

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us that paragraph 10 of this judgment squarely covers the case against the State, where, commercial goods without change of their identity as such, are merely subject to some processing or finishing, or are merely joined together, and therefore remain commercially the same goods which cannot be taxed again, given the rigor of Section 15 of the Central Sales Tax Act. We fail to see how the aforesaid judgment can further carry the case of the revenue. 18. We may note that in Civil Appeal No.4318 o .....

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lded an order dated 14.6.2007 by which the assessee was sent back to the Appellate Tribunal for rectification. This rectification petition was dismissed by an order dated 30.11.2005. A Sales Tax Revision Petition was thereafter filed against both orders, namely, 11.1.2002 and 30.11.2005. The High Court, in the impugned judgment dated 1.9.2006, unfortunately adverted only to the rectification order dated 30.11.2005 and not to the original order of 11.1.2002 and thus dismissed the revision petitio .....

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taxed at the rate of 4%. 19. In the State Appeals, we find that the lead impugned judgment in Civil Appeals arising out of SLP(C) Nos.18646-19117 of 2015 dated 10.12.2013 is an exhaustive judgment which has considered not only the facts in great detail but also the law laid down by the Supreme Court. We affirm the said judgment and dismiss the appeals of the State of Karnataka. Civil Appeal No.4319 of 2007 M/s. Ananth Engineering Works v. State of Karnataka 20. This appeal is by the assessee fro .....

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