State of Karnataka and Anr. vs M/s Durga Projects Inc

HELD : 1.1 Section 4 of the Karnataka Value Added Tax Act, 2003 imposes a liability to pay taxes upon every dealer on his taxable turnover. Besides imposing a liability, Section 4 prescribes the rate of tax. The rate of tax on goods mentioned in the Second, Third and Fourth Schedules was specified in subclauses (i), (ii) and (iii) of Section 4(1)(a). The Second Schedule at the material time attracted a rate of 1%, the Third Schedule 4% and the Fourth Schedule, 20%. On ‘other goods’ the rate of tax was 12.5% under Section 4(1)(b). The expression ‘other goods’ in Section 4(1)(b) evidently means those goods which are not governed by Section 4(1)(a). Where goods are specifically covered by any of the entries of the Second, Third and Fourth Schedules, such goods would be covered by the specific entry relating to those goods. Recourse to the residual provisions of Section 4(1)(b) would be available only in respect of ‘other goods’, that is, goods which did not fall within the purview of s. 4(1)(a). [Para 15] [133-A-D]

1.2 It would be far-fetched to accept that in enacting Section 4(1)(b), the legislature intended to prescribe a uniform rate of tax, prior to 1.4.2006, for goods incorporated in a works contract. The scheme legislated upon in Section 4(1) envisaged specific rates of tax on goods falling within the Second, Third and Fourth Schedules. What Section 4(1)(b) provided was a residual entry under which a rate of 12.5% was provided ‘in respect of other goods’. The expression ‘in respect of other goods’ meant goods other than those falling in the Second, Third and Fourth Schedules. Declared goods specified in Section 14 of the Central Sales Tax Act, 1956 were comprehended in Serial No.20 of the Third Schedule to the KVAT Act 2003 and attracted a rate of 4%, which applied to goods in that Schedule. As a result of the deeming definition of the expression sale, a transfer of property in goods involved in the execution of a works contract become exigible to tax. Exigibiliy to tax, is distinct from the rate of tax and the measure of the tax. In Gannon Dunkerly & Co, it was held that it is open to the states to provide a uniform rate of tax on goods transferred in the course of the execution of a works contract. The exigibility to tax is not (as it cannot be) dependent on the state prescribing a uniform rate of tax for goods involved in works contracts. That the KVAT Act 2003 did not provide a uniform rate of tax prior to 01.04.2006 on goods involved in the execution of works contract also becomes apparent when the amendment which introduced Section 4(1)(c) by Act 4 of 2006 is read. As a result of the amendment, the legislature provided that the rate of tax in respect of the transfer of property in goods involved in the execution of a works contract would be as provided in the Sixth Schedule. The Sixth Schedule elucidates works contracts of various descriptions and elucidates the associated rates of tax for each distinct category. Declared goods involved in the execution of a works contract are taxable at the rates mentioned in Section 15 of the CST Act while all other goods involved in the execution of a works contract are taxable at the rate prescribed in the Sixth Schedule upon the amendment. The amendment introducing Section 4(1)(c) took effect on 1 April 2006. The amendment is not clarificatory. It was with effect from 1 April 2006 that the State legislature mandated a uniform rate of tax on goods involved in the execution of works contracts as provided in the Sixth Schedule. The position as it existed upto 31 March 2006 was altered with effect from 1 April 2006. It cannot be said that upto 31 March 2006, Section 4(1)(b) envisaged a uniform rate for the transfer of goods involved in the execution of a works contract. Section 4 imposes the liability to pay tax on every dealer who is or is required to be registered, on his taxable turnover. The concept of taxable turnover in Section 2(34) is defined with reference to the turnover on which a dealer is liable to be taxed, determined after making deductions from the total turnover as prescribed. The concept of taxable turnover thus incorporates the expressions ‘turnover’ and ‘total turnover’, both of which are defined in Sections 2(36) and Section 2(35) respectively. The manner in which the total turnover of a dealer is computed is prescribed in Rule 3(1)(b), in the case of a normal sale, and in Rule 3(1)(c), for the purposes of a works contract. In the case of a works contract, deductions are envisaged under sub-rule (2) of Rule 3, which includes amounts such as labour and other charges. Section 7 provides that the sale of goods shall be deemed to have taken place at the time of the transfer of title or possession or incorporation of the goods in the course of the execution of a works contract. The interpretation placed on the provisions of the Act as they existed prior to 1.4.2006 is consistent with the plain meaning of the words used by the legislature. The submission that Section 4(1)(b), as it existed prior to 1.4.2006 was a catchall entry providing for a uniform rate of tax on goods involved in the execution of a works contract, cannot be accepted. Such a construction does not emerge from the plain meaning of the words used and is in fact belied by the need which was felt by the legislature to impose a uniform rate of tax only with effect from 1 April 2006. The genesis of the instant dispute arises out of the proceedings which were initiated before AAR by the respondent seeking guidance on the applicable rate of tax on the law as it existed until 31.03.2006. This proceeding concludes the issue of interpretation. It is clarified by way of abundant caution, that issues of a factual nature, will fall for adjudication in the course of assessment proceedings. It was open to state legislatures to provide uniform rates of tax on goods involved in the execution of works contracts. Many state legislatures did so. The Karnataka legislature did so with effect from 1.4.2006, not earlier. Thus, there is no merit in the challenge preferred by the State of Karnataka to the impugned judgment and order of the High Court. [Para 16 and 17] [133-E-G; 134-A-H; 135-A-F]

Gannon Dunkerly & Co v. State of Rajasthan

(1993) 1 SCC 364 : [1992] 3 Suppl. SCR 103 ; Dunlop India Ltd. v Union of India (1976) 2 SCC 241 : [1976] 2 SCR 98; Bharat Forge and Press Industries Pvt. Ltd. v. CCE (1990)1 SCC 532 : [1990] 1 SCR 60 ; HPL Chemicals Ltd. v CCE (2006) 5 SCC 208 : [2006]

1 Suppl. SCR 125 ; Balabhagas Hulaschand v. State of Orissa (1976) 2 SCC 44 : [1976] 2 SCR 939 ; Bansal Wire Industries Ltd. v. State of Uttar Pradesh (2011) 6 SCC 545 : [2011] 7 SCR 416 – referred to.