In the Supreme Court of India CIVIL APPEAL NO 811 OF 2018 Petitioner State Of Karnataka Respondent M/S Durga Projects Inc. Date of Judgement March 6, 2018 Bench Justice D.Y. Chanrachud; Justice M. Khanvikar; CJI Dipak Mishra
Introduction
Arising out of SLP(C) No 27048 of 2013 1 from a judgment of a Division Bench of the High Court which was passed on 28th September 2012, The State of Karnataka appealed in the High Court. The issue under the clear observation of the High Court identified with the pace of expensive material to works contracts before 1 April 2006 when Section 4(1)(c) was brought by a correction into the Karnataka Value Added Tax Act 2003 (‘KVAT Act 2003’).
Statues & provisions involved
a. Section 4(1)(b), Section 4(1)(c) of KVAT Act, 2003
b. Section 14, section 15 of the Central Sales Tax Act, 1956
c. Article 286 (3)(b), Article 366 (29A)(b) of the Constitution of India, 1950.
Facts:
The respondent is occupied with executing common works contacts and is enlisted both under the KVAT Act and the Central Sales Tax Act (hereinafter referred to as CST Act). It buys building materials like equipment, sand and blocks falling under the Third Schedule to the KVAT Act, pronounced goods under Section 15 of the CST Act and other non-booked goods from inside and outside the State and from unregistered vendors.
On 31 January 2006, it made an application before the Authority for Advance Clarification and Ruling (hereinafter referred to as AAR) for direction on the pace of expense material for the execution of common works contracts under the KVAT Act. The AAR held by its request dated 2 August 2006 that since there was no particular passage accommodating the pace of expense on stirs contracts up to 31 March 2006, a charge on goods utilized in the execution of works contact ought to be imposed as per the rate of tax pertinent to the offer of products under the KVAT Act 2003.
The seller looked for additional explanation on the issues that were brought up in the first application about the rate of tax on iron and steel utilized in the execution of common works contracts. By its decision dated 7 December 2006, AAR held that the pace of expense relevant on iron and steel is 4 percent when utilized in a similar structure, in any case, the rate of tax would be 12.5 percent.
A request was passed in modification by the Commissioner of Commercial Taxes (Karnataka), Bangalore, holding that the sets of AAR were mistaken and biased to the interests of the income. The seller favored a business charge claim under the watchful eye of the High Court of Karnataka, oppressed by the provisional request of the Commissioner of Commercial Taxes.
The Court held that the deal under the works contract is a considered offer of the move of the products alone and it isn’t the same as the typical deal. Henceforth, the duty must be exacted on the cost of the products and material utilized underway agreement as though there was an offer of merchandise and materials. The property in the merchandise utilized in progress agreement will be considered to have been disregarded to the purchaser when the products or materials utilized are consolidated to the moveable property by the rule of growth to the moveable property.
Issue
Whether the State legislature of Karnataka had involved goods in the execution of works contract to provide for a uniform rate of tax by classifying the goods in separate categories prior 1st of April 2006?
Contentions
Petitioner’s contentions
The state contended that the parent legislation as a part of it included various definitions like the definitions of sales, goods, turnover, total turnover, taxable turnover under the sections 2(29), 2(15), 2(36), 2(35), 2(34) respectively. A levy of tax on works contracts even prior 1st April 2004 envisaged because of KVAT Act is immaterial.
Under section 4(1)(b) the rate of tax for works contract will fall and to be considered as residual entry the tax rates for other goods prescribed under residual entry. Within the ambit of definition, the term goods fall under Section 2(15). The tax is leviable on individual merchandise/goods in a works contract that will render the whole scheme of the Act preceding 01.04.2006 unworkable and would add up to annulling the toll on works contracts before 01.04.2006. The taxable occasion in a deemed sale (Section 7) is the hour of consolidation of the goods over the span of execution of the works contract.
Respondent’s contentions
The KVAT Act was authorized in 2003 and its charging segment (Section 3) came into power on 1 May 2005. In spite of the fact that in Gannon Dunkerly and Co.’s case, this Court allowed State assemblies to tax goods engaged with the execution of works contracts at a uniform rate, the council of Karnataka didn’t do as such.
No arrangement existed for a uniform rate on all products engaged with the execution of works contracts until 31 March 2006; to the extent that pronounced goods are concerned, Section 4(1)(a) accommodated a rate of 4% on products referenced in the Third Schedule. Serial No.20 of the Third Schedule alludes to announced products indicated in Section 14 of the CST Act 1956. Subsequently, iron and steel which were announced products indicated in Section 14 of the CST Act were secured by the Third Schedule and were liable to tax at 4%; goods not secured by the Third Schedule were obligated to tax at 12.5% under Section 4(1)(b); around then for example up to 31.03.2006, there was no arrangement in the KVAT Act accommodating a uniform rate in regard of products provided in the execution of a works contract.
To the extent that the articulation ‘other products’ in Section 4(1)(b) is concerned, it just implied and secured the goods other than those secured by Section 4(1)(a). The products referenced in the Second, Third or Fourth Schedules (right now iron and steel secured by Serial No.20 of the Third Schedule) were explicitly secured by the said Schedules and there could be no degree to entrust these particular goods secured by the said Schedules to the lingering passage ‘Other goods’ in Section 4(1)(b). This situation of law is all around settled by the decisions of this Court in Dunlop India Ltd. v Union of India[i] and Bharat Forge and Press Industries Pvt. Ltd. v CCE[ii] .
Judgment
Ratio decedendi:
- It was held that it would be outlandish to acknowledge that in establishing Section 4(1)(b), the governing body planned to endorse a uniform rate of expense, before 1.4.2006, for merchandise consolidated in a works contract. Because of the regarding the meaning of the articulation deal, an exchange of property in goods associated with the execution of a works contract become exigible to impose. That the KVAT Act 2003 didn’t give a uniform pace of duty before 01.04.2006 on products engaged with the execution of works contract additionally becomes clear when we read the alteration which presented Section 4(1)(c) by Act 4 of 2006. Because of the correction, the legislation has given that the rate of tax in regard to the exchange of property in goods associated with the execution of a works contract would be as given in the Sixth Schedule.
- Subsequently proclaimed goods engaged with the execution of a works contract are assessable at the rates referenced in Section 15 of the CST Act while every single other great associated with the execution of a works contract is taxable at the rate endorsed in the Sixth Schedule upon the revision. It was with impact from 1 April 2006 that the State council commanded a uniform rate of tax on products associated with the execution of works contracts as gave in the Sixth Schedule.
- As per the judges, they can’t buy into the accommodation which has been encouraged for the benefit the appealing party that Section 4(1)(b), as it existed before 1.4.2006 was a trick all passage accommodating a uniform rate of tax on products engaged with the execution of a works contract. It was available to state assemblies to give uniform rates of expense on goods engaged with the execution of works contracts.
Obiter dicta:
The reason basic this rule is that goods associated with the execution of a works contract can be grouped into a different classification, to accommodate a uniform rate of tax. The main problem under the in front of this Court was with respect to whether prior 1 April 2006, the Karnataka state legislation had in certainty done as such. The response to this is in the negative, on plain and normal signs of the words utilized, as the literal interpretation of construction is used.
Conclusion
The procedures which were started before AAR by the respondent looking for direction on the relevant pace of assessment on the law as it existed until 31.03.2006. This procedure finishes up the issue of understanding. By method for inexhaustible alert, that issues of an accurate sort will succumb to arbitration over the span of appraisal procedures. It was available to state councils to give uniform rates of tax on merchandise engaged with the execution of works contracts. Many state governing bodies did as such. The State Legislature of Karnataka did as such with impact from 1.4.2006, not prior.
“The views of the authors are personal“
Reference
[i] Dunlop India Ltd. v Union of India (1976) 2 SCC 241).
[ii] Bharat Forge and Press Industries Pvt. Ltd. vs. CCE (1990)1 SCC 532).
