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2018 Supreme(SC) 214
SUPREME COURT OF INDIA
DIPAK MISRA, CJI., A.M. KHANWILKAR, D.Y. CHANDRACHUD, JJ.
State of Karnataka & Anr. - Appellants
Versus
M/s Durga Projects INC - Respondent
Civil Appeal Nos. 811 & 812-817 of 2018 (Arising out of SLP(C) No. 27048 of 2013 & 10570-10575 of 2015)
Decided On : 06-03-2018
IMPORTANT POINT
In case of works contract sale of goods takes place when goods are incorporated in course of execution of the contract.
Sale of goods including in a works contract is chargeable u/s 3, KVAT Act, 2003.
It is permissible for the State legislatures to prescribe a uniform rate of tax for all goods involved in the execution of works contracts.
Headnote:(a) Karnataka Value Added Tax Act 2003 – Section 7 – Sale of goods – Works contract – Takes place when goods are incorporated in course of execution of the contract. (Para 10)
(b) Karnataka Value Added Tax Act, 2003 – Section 3 r/w section 2(29) – Works contract – Sale of goods including in a works contract is chargeable u/s 3 – Article 366(29A), Constitution of India. (Para 13)
(1976) 2 SCC 44; (2011) 6 SCC 545; (1976) 2 SCC 241; (1990)1 SCC 532 – Referred
(c) Karnataka Value Added Tax Act, 2003 – Section 4 – Tax on taxable turnover – Exemption available u/s 4(1)(b) only in respect of ‘other goods’ not falling within purview of section 4(1)(a). (Para 14)
(2006)5 SCC 208 – Relied upon
(d) Constitution of India – Article 366(29A) – Permissible for the State legislatures to prescribe a uniform rate of tax for all goods involved in the execution of works contracts – Not done in Karnataka prior to 1 April 2006. (Para 15, 16)
(1993) 1 SCC 364 – Relied upon
Facts of the case:
The appellant made an application before the Authority for Advance Clarification and Ruling (‘AAR’) for guidance on the rate of tax applicable for the execution of civil works contracts under the KVAT Act. The AAR held by its order dated 2 August 2006 that since there was no specific entry providing for the rate of tax on works contracts up to 31 March 2006, tax on goods used in the execution of works contract should be levied in accordance with the rate of tax applicable to the sale of goods under the KVAT Act 2003.
The dealer sought a further clarification on the issues that were raised in the original application about the rate of tax on iron and steel used in the execution of civil works contracts. By its ruling dated 7 December 2006, AAR held that the rate of tax applicable on iron and steel is 4 per cent when used in the same form, otherwise the rate of tax would be 12.5 per cent.
Subsequently, an order was passed in revision by the Commissioner of Commercial Taxes (Karnataka), Bangalore, holding that the orders of AAR were erroneous and prejudicial to the interests of the revenue.
The High Court allowed the tax appeal filed by the appellant.
Finding of thee Court:
There is no infirmity in the impugned judgment.
Result: Appeals dismissed.
JUDGMENT :
D.Y. Chandrachud, J.
Civil Appeal No. 811 of 2018:
(Arising out of SLP(C) No 27048 of 2013)
1. The State of Karnataka is in appeal from a judgment of a Division Bench of the High Court dated 28 September 2012. The issue before the High Court related to the rate of tax applicable to works contracts prior to 1 April 2006 when Section 4(1)(c) was introduced by an amendment into the Karnataka Value Added Tax Act 2003 (‘KVAT Act 2003’).
2. The respondent is engaged in executing civil works contacts and is registered both under the KVAT Act and the Central Sales Tax Act. It purchases building materials like hardware, sand and bricks falling under the Third Schedule to the KVAT Act, declared goods under Section 15 of the CST Act and other non-scheduled goods from within and outside the State and from unregistered dealers. On 31 January 2006 it made an application before the Authority for Advance Clarification and Ruling (‘AAR’) for guidance on the rate of tax applicable for the execution of civil works contracts under the KVAT Act. The AAR held by its order dated 2 August 2006 that since there was no specific entry providing for the rate of tax on works contracts up to 31 March 2006, tax on goods used in the execution of works contract should be levied in accordance with the rate of tax applicable to the sale of goods under the KVAT Act 2003. The relevant part of the order is extracted below:
“…correctly understood that there is no specific entry providing rate of tax on works contract under KVAT Act, up to 31-3-2006 and therefore, tax should be levied as per the rate applicable on the value of each class of goods involved in the execution of works contract. Therefore, as regards the rate of tax on the deemed sales of goods involved in the execution of works contract, it is to be clarified that tax is payable at the rate applicable to the Sale of Goods Act upto 31.03.2006. And by KVAT (Amendment) Act, 2006, Clause (c) has been got inserted to section 4(1) w.e.f. 1.4.2006, for levy of tax in respect of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, and appending VI Schedule to the Act, listing out the items/descriptions of the works contract with the rate of tax corresponding to them. As per entry 23 of the said schedule, “all other work contracts not specified in any of the above categories including composite contracts with one or more of the above categories” are liable to tax @ 12.5% w.e.f. 01.04.2006. The civil works contract falls under the said entry and therefore, is liable to tax @ 12.5% only. Hence, it is clarified accordingly.”
3. The dealer sought a further clarification on the issues that were raised in the original application about the rate of tax on iron and steel used in the execution of civil works contracts. By its ruling dated 7 December 2006, AAR held that the rate of tax applicable on iron and steel is 4 per cent when used in the same form, otherwise the rate of tax would be 12.5 per cent.
4. Subsequently, an order was passed in revision by the Commissioner of Commercial Taxes (Karnataka), Bangalore, holding that the orders of AAR were erroneous and prejudicial to the interests of the revenue. According to the Commissioner, there is a deemed sale in the course of the execution of a works contract by incorporation of the goods into the work. This is distinct from a normal sale of goods. In the case of a works contract, it is a conglomerate of goods that is transferred and there is no sale of individual goods. According to the Commissioner, both 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. Taxable turnover in a works contract is determined after allowing deductions from the total consideration admissible under Rule 3(2) of the KVAT Rules 2005. On the other hand, in the case of a normal sale of goods, the aggregate
