Karnataka High Court

M/S Durga Projects Inc, vs The State Of Karnataka on 28 September, 2012

Author: K.Sreedhar Rao B.Manohar
1
IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 28TH DAY OF SEPTEMBER 2012
PRESENT
THE HON'BLE MR. JUSTICE K.SREEDHAR RAO
AND
THE HON'BLE MR. JUSTICE B.MANOHAR
STA No.72/2010
BETWEEN :
M/S DURGA PROJECTS INC,
15, BULL TEMPLE ROAD,
GANDHI BAZAR,
BANGALORE - 560 004,
(REPRESENTED BY ITS PARTNER
NEERAJ JHUNJANWALA). ...APPELLANT (BY SRI.B.G.CHIDANANDA URS &
SRI.B.S.PRASAD, ADVS) AND:
1. THE STATE OF KARNATAKA
THROUGH THE SECRETARY
FINANCE DEPARTMENT
VIDHAN SOUDHA,
BANGALORE.
2. COMMISSIONER OF COMMERCIAL TAXES
VTK, GANDHINAGAR,
KALIDASA ROAD,

BANGALORE ...RESPONDENTS
(BY SMT.S.SUJATHA, AGA)
2
STA FILED UNDER SEC. 66(1) OF THE VALUE ADDED TAX ACT, 2003, AGAINST
THE ORDER DATED:12.10.2010 PASSED IN KVAT/SMR/CR-11/10-11 ON THE FILE
OF THE COMMISSIONER OF COMMERCIAL TAXES, GANDHINAGAR,
BANGALORE, SETTING ASIDE THE PORTION OF THE ORDERS OF THE ACAR
DATED 28.2.2006 AND 7.12.2006 RELATILNG TO THE CLARIFICATION OF THE
RATE OF TAX APPLICABLE ON THE TRANSFER OF PROPERTY IN GOODS
INVOLVED IN THE COURSE OF EXECUTION OF WORKS CONTRACT UPTO
31.3.2006.
THIS STA HAVING BEEN HEARD AND RESERVED AND
COMING ON FOR PRONOUNCEMENT OF JUDGEMENT THIS DAY, B.MANOHAR J.,
DELIVERED THE FOLLOWING:
JUDGEMENT
The appellant is a Partnership Firm registered under the provisions of Karnataka Value
Added Tax Act, 2003 (hereinafter referred to as KVAT Act) engaged in the business of civil
works contract, purchase of necessary building materials, hardware, the goods falling under
III schedule, the declared goods under Section 15 of the CST Act and other non-scheduled
goods within and outside the State as well as from the unregistered dealers.
2. The appellant made an application under Section 60 of the KVAT Act before the Authority
for Clarifications and Advance Rulings (ACAR for short) seeking for clarification in respect
of : 3
a) Applicability of the rate of tax on execution of civil works contract under the Act; and
b) Whether input tax credit can be availed out of output tax paid by the Contractor.
3. The ACAR after examining the matter in detail, by its order dated 2-8-2006 came to the
conclusion that there is no specific entry providing rate of tax on works contract under the
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 i.e. if the goods
involved are taxable at the rate of 4%, then works contract rate would be at 4% and if the rate
is 12.5%, the works contract rate would also be at 12.5%. With regard to the clarification of
input tax credit is concerned, no finding has been given. The appellant subsequently sought
for rectification of the order dated 2-8-2006 before the ACAR. The ACAR further clarified
on 7-12-2006 stating that iron and steel is one of the commodities specified under Section 14
of the CST Act 1956, as goods of special importance and therefore, the iron and steel are to
be subjected to works contract tax at 4%, when it was used in the same form and if they are
used in manufacture or fabrication of product, it would no longer qualify as iron and steel and
would have to be subjected to works contract tax at 12.5%.

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4. The Commissioner for Commercial Taxes after noticing the clarification order passed by
the ACAR found that the order passed by the ACAR is erroneous and prejudice to the interest
of the revenue and issued notice under Section 64(2) of the Act on 25-8-2010. The appellant
has filed detail objections to the said notice. The Commissioner for Commercial Taxes after
considering the objections filed by the appellant by its order dated 12-10-2010 set aside the
order passed by the ACAR in exercise of its suo-motu revisional power and held that the
goods used in the works contract cannot be treated on par with the normal sale of goods for
the purpose of arriving at the rate for the period prior to 1-4-2006. Further, the iron and steel
or any other declared goods used for executing the works contract would be liable to be taxed
as per the State Law. The appellant, being aggrieved by the order dated 12-10-2010 passed by
the Commissioner for Commercial Taxes has preferred this appeal.
5. Sri.B.G.Chidananda Urs, the advocate appearing for the appellant contended that the order
passed by the Commissioner under Section 64(2) of the Act is contrary to law. The order of
the Commissioner has the effect of taking away the powers of the ACAR setting aside the
order and not deciding the issue that has been raised before the ACAR. He further contended
that Section 3(1) of the KVAT Act provides for the State to levy tax on every 'sale of goods'
in the State by the registered dealer or a dealer 5
liable to be registered in accordance with the provisions of the Act. The definition of the 'sale'
includes 'deemed sale'. The finding of the Commissioner that the concept of 'deemed sale'
should be applied only to the conglomerate of goods and not in its independent firm is against
the definition of the 'sale' under Section 2(29) of the KVAT Act. Further the expression
'goods' under article 336(29-A) would mean goods in the same form or some other form. The
finding of the Revisional Authority at para 4 would be opposed to the deeming fiction
introduced by 45 th amendment of the Constitution. Section 4(1)(c) has been introduced by
the State Government w.e.f. 1-4-2006 and the rate of tax is provided under the Statute.
Hence, there cannot be any rate prior to 1-4-2006. Further the decision of this court in
NAGARJUNA CONSTRUCTIONS COMPANY LIMITED AND OTHERS v/s STATE OF
KARNATAKA (in W.P.Nos.29932-33/2009) will cover the field. Wherein this court held
that steel and steel products having been used as a raw material and incorporated into civil
works or other works contract in the same form, except that the same was fashioned to suit
the requirement, before the same was merged into the works did not loose their nature or
form and therefore could not be subjected to tax as the goods have already suffered tax as
declared goods under CST Act and sought for setting aside the same.
6
6. On the other hand, Smt.S. Sujatha, learned Additional Government Advocate argued in
support of the order passed by the Revisional Authority and contended that the finding of the
ACAR is contrary to law and prejudicial to the interest of the revenue. She further contended
that as per the definition of 'goods', it includes all materials, commodities and articles
involved in the execution of works contract. The rate of tax is on the value of goods involved
in the execution of the works contract and not a separate value of each of the goods. Even
when there is no schedule of works contract under the Act prescribing rate of tax on different
types of works contract, the tax liability exists up to 31-3-2006, on the value of goods
involved in the execution of works contracts, but not on individual goods as ruled by the
ACAR. Further she has contended that in works contract, tax on value of the goods

incorporated into the works, when not specified in any of the schedules to the Act, has to be
construed as a levy on unscheduled goods and therefore subjected to tax under Section
4(1)(b) of the Act, at the rate of 12.5%. Further, the ACAR has not examined whether the
goods purchased were converted into the goods before incorporation into the works is to be
examined. This aspect of the matter has also not been considered by the ACAR. Hence, the
order passed by the ACAR cannot be sustainable and sought for dismissal of the appeal. 7
7. The substantial questions of law that arise for consideration in this appeal are:
i) Whether the Revisional Authority is justified in reviewing the order of the ACAR, which
has only clarified the queries made by the appellant? ii) The finding of the revisional
authority that the goods used in the works contract cannot be treated on par with the normal
sale of goods for the purpose of arriving at the rate of tax for the period prior to 1-4-2006?
8. Section 3(1) of the Act provides for levy of tax on every sale of goods in the State by a
registered dealer or a dealer liable to be registered, in accordance with the provisions of the
Act. Section 4 of the Act deals with the rate of tax on every sale of the goods, which reads as
under:
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 percent
(in respect of goods specified in serial number 30 and five per cent in respect of other goods),
and 8
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 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.]
9. Section 4(1)(c) was inserted by Act No.4 of 2006 w.e.f. 1-4-2006 thereby levying tax on
the works contract by specifying the rate of tax under the Sixth Schedule. Prior to the
amendment, the tax is being collected on the rate applicable to sale of each class of goods
under Section 3(1) of the Act. In view of the insertion of sub-Section 4(1)(c) to the Sixth

Schedule to the Act, the appellant made an application before the ACAR with regard to the
rate of tax applicable on the execution of civil works contract up to 31-3-2006 and thereafter
under Karnataka Value Added Tax. The ACAR by its order dated 2-8-2006 clarified the
same. Subsequently, on further clarification sought for by the appellant, the ACAR by its
order dated 07-12-2006 further clarified that if the iron and 9
steel is used in the same form in the course of execution of the works contract, it is liable to
tax at 4% as per Section 4(1)(c) of the Act. However, the Commissioner feels that
clarification made by the ACAR is prejudicial to the interest of the revenue, insofar as
clarification regarding the rate of tax on works contract prior to 31-3-2006. Accordingly
issued notice and reviewed the order passed by the ACAR.
10. Section 3(1) of the Act provides for levy of tax on every sale of goods. Section 4
prescribes the rate of tax. Neither Section 3 nor Section 4 of the Act seeks or intend to levy or
prescribe different rate of tax for the goods involved in the normal sale and for the goods
involved in the deemed sale. Both normal sale as well as the deemed sale should be treated as
one and the same with respect to levy of tax on sale of goods. The Commissioner opined that
the rate of tax is on the value of goods involved in the execution of works contract and not on
separate value of each goods. Thus, even when there is no schedule of works contract under
the Act prescribing the rate of tax on different type of contract, the tax liability exists upto 313-2006. It falls under Section 4(i)(b). Hence, levy of tax has to be under Section 4(i)(b). The
finding of the ACAR is contrary to law. On the other hand, the appellant contended that only
from the amendment of the Act w.e.f. 1-4-2006 in respect of transfer of property in goods
whether as goods or in some other form involved in the execution 10
of works contract, specified in column 2 of the Sixth Schedule subject to Sections 14 and 15
of the Central Act, 1956, at the rates specified in the corresponding entry in column No.3 of
the said Schedule can levy. The amendment is prospective in operation. The action has
already been done prior to 31-3-2006 and the tax cannot be levied under Section 4(1)(c) of
the Act. The appellant also relied upon the judgment made in STA No.14/2010 in
M/S.MANGALORE MINERAL PRIVATE LIMITED v/s STATE OF KARNATAKA
disposed of on 12-3-2010 and contended that the amendment is only a prospective operation
and cannot be claimed retrospectively. Admittedly, prior to 1-4-2006 insertion of clause (c) to
Section 4, the rate of tax was not prescribed in respect of transfer of the property in goods,
(whether as goods or in any other form) involved in the execution of works contract. Hence,
the tax has to be levied as per Section 3(1) of the Act. The sale under the works contract is a
deemed sale of transfer of the goods alone and it is not different from the normal sale. Hence,
the tax has to be levied on the price of the goods and material used in the works contract as if
there was a sale of goods and materials. The property in the goods used in the work contract
will be deemed to have been passed over to the buyer as soon as the goods or material used
are incorporated to the moveable property by principle of accretion to the moveable property.
Hence, we are of the view that the order passed by the Commissioner is contrary to law. For
the period prior to 1-4-2006, tax has 11
to be levied as per Section 3(1) of the Act and for the period subsequent to 1-4-2006, tax has
to be levied as per Section 4(1)(c) of the Act. Hence, the substantial questions of law are held
in favour of the appellant.
11. Accordingly, we pass the following: ORDER

The appeal is allowed. The order passed by the Commissioner is set aside the order passed by
the ACAR is restored. Sd/JUDGE
Sd/JUDGE