STATE OF KARNATAKA AND ANR. versus M/S DURGA PROJECTS INC on 6 March 2018

STATE OF KARNATAKA AND ANR.

v.

M/S DURGA PROJECTS INC(Civil Appeal No.811 of 2018)

MARCH 06, 2018

[DIPAK MISRA, CJI, A. M. KHANWILKAR ANDDR. D. Y. CHANDRACHUD, JJ.]

Karnataka Value Added Tax Act, 2003 – s. 4(1)(c) and (b) –Works contracts prior to 1.04.2006 – Rate of tax applicable – Held:KVAT Act 2003 did not provide a uniform rate of tax prior to01.04.2006 on goods involved in the execution of works contract –It would be far-fetched to accept that in enacting s. 4(1)(b), thelegislature intended to prescribe a uniform rate of tax, prior to1.4.2006, for goods incorporated in a works contract – Schemelegislated upon in s. 4(1) envisaged specific rates of tax on goodsfalling within the Second, Third and Fourth Schedules – Section4(1)(b) provided a residual entry under which a rate of 12.5% wasprovided ‘in respect of other goods’ – It was with effect from1.04.2006 that the State legislature mandated a uniform rate of taxon goods involved in the execution of works contracts as providedin the Sixth Schedule – Position as it existed upto 31.03.2006 wasaltered with effect from 1.04.2006 – It cannot be said that upto31.03.2006, s. 4(1)(b) envisaged a uniform rate for the transfer ofgoods involved in the execution of a works contract.

Respondent-assessee, engaged in executing civil workscontacts, is registered both under the Karnataka Value AddedTax Act, 2003 and the Central Sales Tax Act. It purchased buildingmaterials 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 fromunregistered dealers. On 31 January 2006, the respondent filedan application before the Authority for Advance Clarification andRuling (AAR) for guidance on the rate of tax applicable for theexecution of civil works contracts under the KVAT Act. The AARheld that since there was no specific entry providing for the rateof tax on works contracts up to 31.03.2006, tax on goods used inthe execution of works contract should be levied in accordancewith the rate of tax applicable to the sale of goods under the KVAT

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AAct 2003. In revision, the orders of AAR were held to beerroneous. The High Court held that for the period prior to1.4.2006, tax has to be levied as per Section 3(1) of the Act andfor the period subsequent to 1.4.2006, tax has to be levied as perSection 4(1)(c) of the Act. Hence, the present appeal.

BDismissing the appeals, the Court

HELD : 1.1 Section 4 of the Karnataka Value Added TaxAct, 2003 imposes a liability to pay taxes upon every dealer onhis taxable turnover. Besides imposing a liability, Section 4prescribes the rate of tax. The rate of tax on goods mentioned inCthe Second, Third and Fourth Schedules was specified in sub-clauses (i), (ii) and (iii) of Section 4(1)(a). The Second Scheduleat the material time attracted a rate of 1%, the Third Schedule4% and the Fourth Schedule, 20%. On ‘other goods’ the rate oftax was 12.5% under Section 4(1)(b). The expression ‘othergoods’ in Section 4(1)(b) evidently means those goods which areDnot governed by Section 4(1)(a). Where goods are specificallycovered by any of the entries of the Second, Third and FourthSchedules, such goods would be covered by the specific entryrelating to those goods. Recourse to the residual provisions ofSection 4(1)(b) would be available only in respect of ‘other goods’,Ethat 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 Section4(1)(b), the legislature intended to prescribe a uniform rate oftax, prior to 1.4.2006, for goods incorporated in a works contract.FThe scheme legislated upon in Section 4(1) envisaged specificrates of tax on goods falling within the Second, Third and FourthSchedules. What Section 4(1)(b) provided was a residual entryunder which a rate of 12.5% was provided ‘in respect of othergoods’. The expression ‘in respect of other goods’ meant goodsother than those falling in the Second, Third and FourthGSchedules. Declared goods specified in Section 14 of the CentralSales Tax Act, 1956 were comprehended in Serial No.20 of theThird Schedule to the KVAT Act 2003 and attracted a rate of 4%,which applied to goods in that Schedule. As a result of the deemingdefinition of the expression sale, a transfer of property in goods H

involved in the execution of a works contract become exigible totax. Exigibiliy to tax, is distinct from the rate of tax and themeasure of the tax. In Gannon Dunkerly & Co, it was held that itis open to the states to provide a uniform rate of taxon goodstransferred in the course of the execution of a works contract.The exigibility to tax is not (as it cannot be) dependent on thestate prescribing a uniform rate of tax for goods involved in workscontracts. That the KVAT Act 2003 did not provide a uniformrate of tax prior to 01.04.2006 on goods involved in the executionof works contract also becomes apparent when the amendmentwhich introduced Section 4(1)(c) by Act 4 of 2006 is read. As aresult of the amendment, the legislature provided that the rateof tax in respect of the transfer of property in goods involved inthe execution of a works contract would be as provided in theSixth Schedule. The Sixth Schedule elucidates works contractsof various descriptions and elucidates the associated rates of taxfor each distinct category. Declared goods involved in theexecution of a works contract are taxable at the rates mentionedin Section 15 of the CST Act while all other goods involved in theexecution of a works contract are taxable at the rate prescribedin the Sixth Schedule upon the amendment. The amendmentintroducing Section 4(1)(c) took effect on 1 April 2006. Theamendment is not clarificatory. It was with effect from 1 April2006 that the State legislature mandated a uniform rate of tax ongoods involved in the execution of works contracts as providedin the Sixth Schedule. The position as it existed upto 31 March2006 was altered with effect from 1 April 2006. It cannot be saidthat upto 31 March 2006, Section 4(1)(b) envisaged a uniformrate for the transfer of goods involved in the execution of a workscontract. Section 4 imposes the liability to pay tax on every dealerwho is or is required to be registered, on his taxable turnover.The concept of taxable turnover in Section 2(34) is defined withreference to the turnover on which a dealer is liable to be taxed,determined after making deductions from the total turnover asprescribed. The concept of taxable turnover thus incorporatesthe expressions ‘turnover’ and ‘total turnover’, both of whichare defined in Sections 2(36) and Section 2(35) respectively. Themanner in which the total turnover of a dealer is computed isprescribed in Rule 3(1)(b), in the case of a normal sale, and in AB

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[2018] 3 S.C.R.

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118SUPREME COURT REPORTS

[2018] 3 S.C.R.

ARule 3(1)(c), for the purposes of a works contract. In the case ofa works contract, deductions are envisaged under sub-rule (2) ofRule 3, which includes amounts such as labour and other charges.Section 7 provides that the sale of goods shall be deemed tohave taken place at the time of the transfer of title or possessionor incorporation of the goods in the course of the execution of aBworks contract. The interpretation placed on the provisions ofthe Act as they existed prior to 1.4.2006 is consistent with theplain meaning of the words used by the legislature. The submissionthat Section 4(1)(b), as it existed prior to 1.4.2006 was a catch-all entry providing for a uniform rate of tax on goods involved inCthe execution of a works contract, cannot be accepted. Such aconstruction does not emerge from the plain meaning of the wordsused and is in fact belied by the need which was felt by thelegislature to impose a uniform rate of tax only with effect from 1April 2006. The genesis of the instant dispute arises out of theproceedings which were initiated before AAR by the respondentDseeking guidance on the applicable rate of tax on the law as itexisted until 31.03.2006. This proceeding concludes the issue ofinterpretation. It is clarified by way of abundant caution, that issuesof a factual nature, will fall for adjudication in the course ofassessment proceedings. It was open to state legislatures toEprovide uniform rates of tax on goods involved in the executionof works contracts. Many state legislatures did so. The Karnatakalegislature did so with effect from 1.4.2006, not earlier. Thus,there is no merit in the challenge preferred by the State ofKarnataka to the impugned judgment and order of the High Court.[Para 16 and 17] [133-E-G; 134-A-H; 135-A-F]F

Gannon Dunkerly & Co v. State of Rajasthan(1993) 1 SCC 364 : [1992] 3 Suppl. SCR 103 ; DunlopIndia Ltd. v Union of India (1976) 2 SCC 241 :[1976] 2 SCR 98; Bharat Forge and Press IndustriesPvt. Ltd. v. CCE (1990)1 SCC 532 : [1990] 1 SCR 60 ;GHPL Chemicals Ltd. v CCE (2006) 5 SCC 208 : [2006]1 Suppl. SCR 125 ; Balabhagas Hulaschand v. State ofOrissa (1976) 2 SCC 44 : [1976] 2 SCR 939 ; BansalWire Industries Ltd. v. State of Uttar Pradesh (2011) 6SCC 545 : [2011] 7 SCR 416 – referred to.

Case Law Reference

[1992] 3 Suppl. SCR 103referred toPara 7[1976] 2 SCR 98referred toPara 7[1990] 1 SCR 60referred toPara 7[2006] 1 Suppl. SCR 125referred toPara 14[1976] 2 SCR 939referred toPara 6 (viii)[2011] 7 SCR 416referred toPara 6 (viii)

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 811 of2018.

From the Judgment and Order dated 28.09.2012 of the High Courtof Karnataka at Bangalore in S.T.A. No. 72 of 2010

WITH

Civil Appeal Nos. 812-817 of 2018.

Devadatt Kamat, AAG, V. N. Raghupathy, Aditya Bhat, RajeshInamdar, Javedur Rahman, Parikshit P. Angadi, Advs for the Appellants.

S. K. Bagaria, Sr. Adv, Bharadwaj S. Iyengar, Vikas Upadhyay,Vidit, K. Ajit Singh, L. Badri Narayanan, Aditya Bhattacharya, Ms. L.Charnaya, Victor Das, Ms. Apeksha Mehta, Yogendra Aldak, KaranSachdev, M. P. Devanath, Advs for the Respondents.

The Judgment of the Court was delivered by DR. 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 DivisionBench of the High Court dated 28 September 2012. The issue beforethe High Court related to the rate of tax applicable to works contractsprior to 1 April 2006 when Section 4(1)(c) was introduced by anamendment into the Karnataka Value Added Tax Act 2003 (‘KVAT Act2003’).

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A2. The respondent is engaged in executing civil works contactsand is registered both under the KVAT Act and the Central Sales TaxAct. It purchases building materials like hardware, sand and bricksfalling under the ThirdSchedule to the KVAT Act, declared goods underSection 15 of the CST Act and other non-scheduled goods from withinand outside the State and from unregistered dealers. On 31 JanuaryB2006 it made an application before the Authority for Advance Clarificationand Ruling (‘AAR’) for guidance on the rate of tax applicable for theexecution of civil works contracts under the KVAT Act. The AAR heldby its order dated 2 August 2006 that since there was no specific entryproviding for the rate of tax on works contracts up to 31 March 2006,Ctax on goods used in the execution of works contract should be levied inaccordance with the rate of tax applicable to the sale of goods under theKVAT Act 2003. The relevant part of the order is extracted below:

“…correctly understood that there is no specific entry providingrate of tax on works contract under KVAT Act, up to 31-3-2006Dand therefore, tax should be levied as per the rate applicable onthe value of each class of goods involved in the execution of workscontract. Therefore, as regards the rate of tax on the deemedsales of goods involved in the execution of works contract, it is tobe clarified that tax is payable at the rate applicable to the Sale ofGoods Act upto 31.03.2006. And by KVAT (Amendment) Act,E2006, 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 executionof a works contract, and appending VI Schedule to the Act, listingout the items/descriptions of the works contract with the rate ofFtax corresponding to them. As per entry 23 of the said schedule,“all other work contracts not specified in any of the abovecategories including composite contracts with one or more of theabove 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.”G

3. The dealer sought a further clarification on the issues that wereraised in the original application about the rate of tax on iron and steelused in the execution of civil works contracts. By its ruling dated 7December 2006, AAR held that the rate of tax applicable on iron andsteel is 4 per cent when used in the same form, otherwise the rate of taxHwould be 12.5 per cent.

4. Subsequently,an order was passed in revision by theCommissioner of Commercial Taxes (Karnataka), Bangalore,holding thatthe orders of AAR were erroneous and prejudicial to the interests of therevenue. According to the Commissioner, there is a deemed sale in thecourse of the execution of a works contract by incorporation of thegoods into the work. This is distinct from a normal sale of goods. In thecase of a works contract, it is a conglomerate of goods that is transferredand there is no sale of individual goods. According to the Commissioner,both before and after the amendment of Section 4(1)(c) with effectfrom 1 April 2006, tax is levied on the taxable turnover of goods involvedin the execution of a works contract. Taxable turnover in a works contractis determined after allowing deductions from the total considerationadmissible under Rule 3(2) of the KVAT Rules 2005. On the otherhand, in the case of a normal sale of goods, the aggregate sale price paidfor a particular commodity constitutes the taxable turnover. Theclarification by AAR was held to be in error in assuming that individualgoods purchased for use in the execution of a works contract aretransferred in the same form and in ruling that the rates of tax on taxableturnover would be the rates applicable to each of the goods purchased.The matter was kept open to be addressed by the assessing authoritiesin accordance with law.

5. The dealer preferred a sales tax appeal before the High Courtof Karnataka, aggrieved by the revisional order of the Commissioner ofCommercial Taxes. By its judgment dated 28 September 2012, the HighCourt allowed the appeal and while setting aside the order in revisionheld as follows:

“The sale under the works contract is a deemed sale of transfer ofthe 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 usedin the works contract as if there was a sale of goods and materials.The property in the goods used in the works contract will be deemedto have been passed over to the buyer as soon as the goods ormaterial used are incorporated to the moveable property by principleof accretion to the moveable property. Hence, we are of the viewthat the order passed by the Commissioner is contrary to law. Forthe period prior to 1-4-2006, tax has to be levied as per Section 3(1)of the Act and for the period subsequent to 1-4-2006, tax has to belevied as per Section 4(1)(c ) of the Act. Hence, the substantialquestions of law are held in favour of the appellant.”

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A6. The submission which has been urged on behalf of the State isthat although Section 4(1)(c) was introduced with effect from 1 April2006, all other provisions in relation to works contracts existed since theinception of the Act in 2003. The definitions of sale (Section 2(29)),goods (Section 2(15)), turnover (Section 2(36)), total turnover (Section2(35)) and taxable turnover (Section 2(34)) were a part of the parentBlegislation. The distinct mechanism for determination of total turnover inrespect of a normal sale and deemed sale was also in existence prior to1 April 2006. Consequently, it has been urged on behalf of the State byMrDevadattKamat, that:

(i) There cannot be any dispute that the KVAT Act envisaged aClevy of tax on works contracts even prior to 01.04.2006;

(ii) The rate of tax for works contracts prior to 01.04.2006 wouldfall under Section 4(1)(b), the residual entry. The residual entry prescribesthe rate of tax for “other goods”, that is, goods which are not specifiedDunder any of the schedules. The goods incorporated in a works contractalso come within the ambit of the definition of goods under Section 2(15);

(iii) In a deemed sale, the conglomerate of the goods or the valueof the contract is to be taken as the amount of goods which are sold.This is specifically incorporated in Rule 3(c); E

(iv) In case of a deemed sale, the concept of ‘total turnover’ isthe total amount of consideration for the transfer of property in the goodsand the same is in contradistinction to the concept of ‘total turnover’ inrespect of a normal sale where it is the value of each goods;

(v) The argument that prior to 01.04.2006 the rate of tax has to beFlevied on the individual goods comprised in the works contract wouldmilitate against the express provisions of the Act and the Rules in forcewhich categorically lay down a distinct procedure for computation ofthe rate of tax in respect of works contracts [Rule 3(1)(c) read withSection 4(1), 2(34), 2(35) and 2(36)]; G

(vi) The contention that the tax is leviable on individual goods in aworks contract will render the entire scheme of the Act prior to01.04.2006 unworkable and would amount to abolishing the levy on workscontracts prior to 01.04.2006; H

(vii) The arguments of the Respondent would effectively renderSection 2(29) read with Rule 3(1)(c) completely redundant and otiose.The taxable event in a deemed sale (See Section 7) is the time ofincorporation of the goods in the course of execution of the works contract.Therefore, to relegate the determination of the rate of taxation to a periodanterior to the taxable event would render the entire scheme of taxationunder the KVAT Act otiose; and

(viii) It is well settled that there is a presumption against redundancyof a statutory provision [BalabhagasHulaschand v State of Orissa, (1976)2 SCC 44]. Furthermore, the suggestion that individual goods are to betaxed separately in a works contract amounts to re-writing the statute,which is against the settled cannon of interpretation that in a taxing statutenothing can be read in. [Bansal Wire Industries Ltd. V State of UttarPradesh, (2011) 6 SCC 545].

7. On the other hand, Mr SK Bagaria, learned senior counselappearing on behalf of the respondent supports the reasoning of theHigh Court on the following grounds:

(i) In the judgment of the Court in Gannon Dunkerly& Co vState of Rajasthan[1], it was held that the State legislatures may tax thegoods involved in execution of a works contract at a uniform rate, whichis different from the rates applicable to individual goods;

(ii) The KVAT Act was enacted in 2003 and its charging section(Section 3) came into force on 1 May 2005. Though in GannonDunkerly& Co (supra), this Court permitted State legislatures to taxgoods involved in the execution of works contracts at a uniform rate, thelegislature of Karnataka did not do so. No provision existed for a uniformrate on all goods involved in the execution of works contracts until 31March 2006;

(iii) The above position was altered when Section 4 was amendedwith effect from 1 April 2006 by Act 4 of 2006. As a result, in terms ofclause (c), subject to sections 14 and 15 of the CST Act, goods involvedin the execution of works contracts are liable to a uniform rate of tax,depending upon the description of the works contract in the SixthSchedule; 1(1993) 1 SCC 364

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A(iv) In so far as declared goods are concerned, Section 4(1)(a)(ii) provided for a rate of 4% on goods mentioned in the Third Schedule.Serial No.20 of the Third Schedule refers to declared goods specified inSection 14 of the CST Act 1956. Hence, iron and steel which weredeclared goods specified in Section 14 of the CST Act were covered bythe Third Schedule and were subject to tax at 4%; goods not covered byBthe Third Schedule were liable to tax at 12.5% under Section 4(1)(b);

(v) After 01.04.2006, Section 4(1)(c) is made subject to Sections14 and 15 of the CST Act for declared goods. Hence declared goodsinvolved in the execution of works contract are from 01.04.2006 taxableat the rates mentioned in Section 15 of the CST Act while all otherCgoods are taxable at a uniform rate under the Sixth Schedule. Thisamendment was made with effect from 01.04.2006 and there is no disputefor the period thereafter;

(v) In so far as the rate of tax is concerned, as stated above,Section 4(1) of the KVAT Act as it stood during the relevant period i.e.Dupto 31.03.2006 specifically provided for the applicable rates as under:

(a) In respect of declared goods as specified in Section 14 of theCST Act @4% (Section 4(1)(a)(ii) read with Serial No.20 of ThirdSchedule); E(b)In respect of the goods mentioned in the Second, Third or FourthSchedules at the respective rates mentioned in Section 4(1)(a)read with the said Schedules;

(c) In respect of other goods, i.e. goods not covered by Section4(1)(a), @ 12.5% under Section 4(1)(b).

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FAt that time i.e. upto 31.03.2006, there was no provision in theKVAT Act providing for a uniform rate in respect of goods supplied inexecution of a works contract. In so far as the expression “other goods”in Section 4(1)(b) is concerned, it only meant and covered the goodsother than those covered by Section 4(1)(a). The goods mentioned inthe Second, Third or Fourth Schedules (in this case particularly iron andGsteel covered by Serial No.20 of Third Schedule) were specifically coveredby the said Schedules and there could be no scope to consign thesespecific goods covered by the said Schedules to the residual entry “Othergoods” in Section 4(1)(b). This position of law is well settled by the judgments of this Court in Dunlop India Ltd. v Union of India[2 ]andBharat Forge and Press Industries Pvt. Ltd. v CCE[3].

(vi) In Gannon Dunkerley’s case (supra) this Court held that itis permissible for the State Legislatures to tax all goods involved inexecution of a works contract at a uniform rate. In spite of this, theKVAT Act which came into force on 01.05.2005 did not provide for auniform rate. The provision for uniform rate in respect of goods suppliedin execution of works contracts was inserted only w.e.f.01.04.2006 andconsequently it is only for the period from 01.04.2006 that a uniform rateunder the newly inserted Clause (c) of Section 4(1) became applicable.

(vii) In so far as the declared goods under Section 14 of the CSTAct are concerned, both before and after 31.03.2006, the KVAT Actmakes it clear that the rate of tax, even when supplied in execution of aworks contract, will be the rate mentioned in Section 15 of the CST Act.Under the KVAT Act as it stood upto 31.03.2006, this position prevailedunder Section 4(1)(a) read with Serial No.20 of the Third Schedule.Under the KVAT Act as it stands after 01.04.2006, the said position hasbeen statutorily provided for in Section 4(1)(c) itself which has beenmade “subject to Sections 14 and 15 of the Central Sales Tax Act, 1956”.

(viii) The tax on sale or purchase of declared goods covered bySections 14 and 15 of the CST Act, even when such goods are suppliedin execution of a works contract covered by Article 366(29A)(b), shallbe subject to the restrictions and conditions mentioned in Section 15 ofthe CST Act. This position of law has been specifically mandated inArticle 286(3)(b) of the Constitution. This position has also beenstatutorily incorporated in the KVAT Act, both before and after31.03.2006.

(ix) A review of the VAT enactments of other States wouldindicate that following the decision in Gannon Dunkerly& Co (supra),some States opted to levy a uniform rate of tax on all goods supplied inthe execution of works contracts. Other states provided for differentapplicable rates. Reference can be made by way of illustration to theVAT Acts for Andhra Pradesh, Delhi, Odisha and Tamil Nadu.

8. The rival submissions have to be analysed.

2 (1976) 2 SCC 241

3 (1990)1 SCC 532

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A9. To facilitate an analysis of the submissions which have beenurged on behalf of the State in appeal, it would be necessary to advert tothe provisions of the KVAT Act 2003 prior to 1 April 2006 bearing on thecontroversy. 1 April 2006 assumes significance because by KarnatakaAct 4 of 2006, clause (c) was introduced into Section 4(1) so as toincorporate a specific rate of tax on the transfer of property involved inBthe execution of works contracts. The rate of tax came to be specifiedfor works contracts of various descriptions in the Sixth Schedule. Buteven before 1 April 2006, as our analysis would indicate, there is nomanner of doubt that works contracts were exigible to the levy of taxunder the KVAT Act 2003.C10. Section 3 of the Act is the charging provision and provides asfollows:

“3. Levy of tax.- (1) The tax shall be levied on every sale ofgoods in the State by a registered dealer or a dealer liable to beregistered, in accordance with the provisions of this Act.D

(2) The tax shall also be levied, and paid by every registered dealeror a dealer liable to be registered, on the sale of taxable goods tohim, for use in the course of his business, by a person who is notregistered under this Act.”

EThe charge of tax is on the sale of goods.The statutory meaningof the expression “sale” is contained in Section 3(29), in the followingterms:

“(29) ‘Sale’ with all its grammatical variation and cognateexpressions means every transfer of the property in goods (otherthan by way of a mortgage, hypothecation, charge or pledge) byFone person to another in the course of trade or business for cashor for deferred payment or other valuable consideration andincludes,- (a) a transfer otherwise than in pursuance of a contract of propertyin any goods for cash, deferred payment or other valuableGconsideration; (b) a transfer of property in goods (whether as goods or insome other form) involved in the execution of a workscontract;

(c) a delivery of goods on hire purchase or any system of paymentby installments; (d) a transfer of the right to use any goods for any purpose (whetheror not for a specified period) for cash, deferred payment or othervaluable consideration”.

(emphasis supplied)

The expression ‘sale’ includes a transfer of property in goods(whether as goods or in some other form) involved in the execution of aworks contract. The expression ‘goods’ is defined in Section 2(15) tomean all kinds of movable property including materials, commoditiesand articles as well as goods involved in the execution of a works contract:

“(15) ‘Goods’ means all kinds of movable property(other thannewspaper, actionable claims, stocks and shares and securities)and includeslivestock, all materials, commodities and articles(including goods, as goods or in some other form) involved in theexecution of a works contractor those goods to be used in thefitting out, improvement or repair of movable property, and allgrowing crops, grass or things attached to, or forming part of theland which are agreed to be severed before sale or under thecontract of sale.”

(emphasis supplied)

Prior to the introduction of Section 4(1)(c) on 1 April 2006, Section4 stood in the following terms:

“4. Liability to tax and rates thereof.- (1) Every dealer who is oris 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 per cent, and

(iii) Fourth Schedule, at the rate of twenty per cent.

(b) in respect of other goods, at the rate of twelve and one halfper cent.”

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ABy Karnataka Act 4 of 2006, clause (c) was introduced into Section4(1). Clause (c) reads thus:

“(c) in respect of transfer of property in goods (whether as goodsor in some other form) involved in the execution of works contractspecified in column (2) of the Sixth Schedule, subject to SectionsB14 and 15 of the Central Sales Tax Act, 1956 (Central Act 74 of1956), at the rates specified in the corresponding entries in column(3) of the said Schedule.”

Section 4 sets out the liability of every dealer to pay tax on histaxable turnover. The expression ‘taxable turnover’ is defined in SectionC2(34) which reads thus :

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“(34) ‘Taxable turnover’ means the turnover on which a dealershall be liable to pay tax as determined after making such deductionsfrom his total turnover and in such manner as may be prescribed,but shall not include the turnover of purchase or sale in the courseof interstate trade or commerce or in the course of export of thegoods out of the territory of India or in the course of import of thegoods into the territory of India and the value of goods transferredor despatched outside the State otherwise than by way of sale.”

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ETaxable turnover comprises of the turnover on which a dealershall be liable to pay tax. Taxable turnover is arrived at by makingdeductions from the total turnover in such a manner as may be prescribedby the rules made under the Act. The definition of ‘taxable turnover’ islinked to the definition of total turnover because it is from the total turnoverthat the prescribed deductions are made. Section 2(35) defines ‘totalFturnover’:

“(35) ‘Total turnover’ means the aggregate turnover in all goodsof a dealer at all places of business in the State, whether or notthe whole or any portion of such turnover is liable to tax, includingGthe turnover of purchase or sale in the course of interstate tradeor commerce or in the course of export of the goods out of theterritory of India or in the course of import of the goods into theterritory of India and the value of goods transferred or despatchedoutside the State otherwise than by way of sale.”

The expression ‘total turnover’ in Section 2(35) is defined to meanthe aggregate turnover of a dealer in all goods, at all places of businessin the State. Hence, the definition of total turnover is linked to turnover.Thelatter expression is defined in Section 2(36) as follows:

“(36) ‘Turnover’ means the aggregate amount for which goodsare sold or distributed or delivered or otherwise disposed of in anyof the ways referred to in clause (29) by a dealer, either directlyor through another, on his own account or on account of others,whether for cash or for deferred payment or other valuableconsideration, and includes the aggregate amount for which goodsare purchased from a person not registered under the Act and thevalue of goods transferred or despatched outside the Stateotherwise than by way of sale, and subject to such conditions andrestrictions as may be prescribed the amount for which goods aresold shall include any sums charged for anything done by the dealerin respect of the goods sold at the time of or before the deliverythereof.

Explanation.- The value of the goods transferred or despatchedoutside the State otherwise than by way of sale, shall be theamount for which the goods are ordinarily sold by the dealer orthe prevailing market price of such goods where the dealer doesnot ordinarily sell the goods.”

Section 7 provides when the sale of goods is deemed to takeplace:

“7. Time of sale of goods.- (1) Notwithstanding anything containedin the Sale of Goods Act, 1930 (Central Act 3 of 1930), for thepurpose of this Act, and subject to subsection

(2), the sale of goods shall be deemed to have taken place at thetime of transfer of title or possession or incorporation of the goodsin the course of execution of any works contract whether or notthere is receipt of payment: Provided that where a dealer issues atax invoice in respect of such sale within fourteen days from thedate of the sale, the sale shall be deemed to have taken place atthe time the invoice is issued.”

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Hence, in the case of a works contract, the sale of goods takesplaceat the time of the incorporation of the goods in the course of itsexecution.

11. The rules framed under the KVAT Act 2003 – the KVATRules 2005 – provide for the determination of total turnover. In the caseBof a normal sale, the total turnover is provided for in Rule 3(1)(b). Thetotal turnover in the case of a works contact is defined in Rule 3(1)(c).Rule 3(1), insofar as is material, provided as follows:

“PART II

TURNOVER REGISTRATION AND PAYMENT OFSECURITYC

Determination of total and taxable turnover

(1) The total turnover of a dealer, for the purposes of the Act,shall be the aggregate of- (a) the total amount paid or payable by the dealer as theconsideration for the purchase of any of the goods in respect ofwhich tax is leviable under sub-section (2) of section 3; D

(b) the total amount paid or payable to the dealer as theconsideration for the sale, supply or distribution of any goods wheresuch sale, supply or distribution has taken place inside the State,whether by the dealer himself or through his agent; E

(c) the total amount paid or payable to the dealer as theconsideration for transfer of property in goods (whether as goodsor in some other form) involved in the execution of works contractincluding any amount paid as advance to the dealer as a part ofsuch consideration; F

(d) the total amount paid or payable to the dealer as theconsideration for transfer of the right to use any goods for anypurpose (whether or not for specified period); (e) the total amount paid or payable to the dealer as theconsideration in respect of goods delivered on hire-purchase orany system of payment by instalments; G

(f) the aggregate of the sale prices received and receivable bythe dealer in respect of sale of any goods in the course of linter-State trade or commerce and export out of the territory of Indiaand sale in the course of import into the territory of India; and H

(g) the value of all goods transferred or despatched outside theState otherwise than by way of sale.”

12. Under Rule 3(2), the taxable turnover is computed by allowingfor certain deductions from the total turnover determined under Rule3(1). Among the deductions to be made are those in respect of amountsexpended towards labourcharges and other charges not involving thetransfer of property in goods in connection with the execution of a workscontract. Clauses (l) and (m) of Rule 3(2) are as follows:

“The taxable turnover shall be determined by allowing the followingdeductions from the total turnover:- …

(l) All amounts actually expended towards labour charges andother like charges not involving any transfer of property in goodsin connection with the execution of works contract includingcharges incurred for erection, installation, fixing, fitting out orcommissioning of the goods used in the execution of a workscontract;

(m) Such amounts calculated at the rate specified in column (3)of the Table below towards labour charges and other like chargesas incurred in the execution of a works contract when such chargesare not ascertainable from the books of accounts maintained by adealer.”

The table below clause (m) specifies types of contracts andalongside,labour and like charges as a percentage of the value of thecontract. The principle is that expenditure on account of labour chargesinvolved in the execution of works contracts is excluded from the totalturnover in order to arrive at the taxable turnover. The liability to pay taxunder Section 4 is on the taxable turnover.

13. The dispute in the present case relates to 2005-06. The caserelates to the position of law in the State of Karnataka, as it stood until31 March 2006. There can be no manner of doubt that even prior to 1April 2006 works contracts were exigible to the levy of tax. The chargingsection, Section 3, mandates that “the tax shall be levied on every sale ofgoods”. The expression ‘sale’ in Section 2(29) means ‘every transferof the property in goods’ including ‘a transfer of property in goods A

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A(whether as goods or in some other form) involved in the execution ofworks contract’. Similarly, the definition of the expression ‘goods’ inSection 2(15) contains a clear reference to “all kinds of movable property”and all materials, commodities and articles (including goods, as goods orin some other form) involved in the execution of works contracts. Thechargeability of goods involved in the execution of works contracts bothBbefore and after 01.04.2006 is a matter which lies beyond any elementof doubt. Such provisions in the state laws – including the State ofKarnataka – followed upon the 46[th] Amendment to the Constitution bywhich the expression ‘tax on the sale or purchase of goods’ wasincorporated in Clause 29A of Article 366 to include taxes on the transferCof property in goods involved in the execution of works contracts.

14. Section 4 imposes a liability to pay taxes upon every dealer onhis taxable turnover. Besides imposing a liability, Section 4 prescribesthe rate of tax. The rate of tax on goods mentioned in the Second, Thirdand Fourth Schedules was specified in sub-clauses (i), (ii) and (iii) ofDSection 4(1)(a). The Second Schedule at the material time attracted arate of 1%, the Third Schedule 4% andthe Fourth Schedule, 20%. On‘other goods’ the rate of tax was 12.5% under Section 4(1)(b). Theexpression ‘other goods’ in Section 4(1)(b) evidently meansthose goodswhich are not governed by Section 4(1)(a). Where goods are specificallyEcovered by any of the entries of the Second, Third and Fourth Schedules,such goods would be covered by the specific entry relating to thosegoods. Recourse to the residualprovisions of Section 4(1)(b) wouldbeavailable only in respect of ‘other goods’, that is, goods which did not fallwithin the purview of Section 4(1)(a). The law on the construction of aresidual entry has been crystalized in several judgments of this CourtFand it would be appropriate to refer to one of them: HPL ChemicalsLtd. v CCE[4]. After adverting to the decisions in Dunlop India Ltd.(supra), and Bharat Forge and Press Industries Pvt. Ltd. (supra),this Court reiterated that “only such goods as cannot be brought underthe various specific entries in the tariff should be attempted to be broughtGunder the residuary entry”. Applying this principle, where goods arespecifically covered by clauses (i), (ii), or (iii) of Section 4(1)(a), recourseto the residual provisions of Section 4(1)(b) would not be available. Toallow a residual provision to consume the specific would be to invert theintent of the legislature. The state wants us to do just that.

H4 (2006)5 SCC 208

15. In Gannon Dunkerly& Co (supra), this Court held that it ispermissible for the State legislatures to prescribe a uniform rate of taxfor all goods involved in the execution of works contracts, even thoughdifferent rates of tax are prescribed for the sale of such goods. Thisfollowed upon the insertion of Article 366(29A)(b). In the opinion of thisCourt:

“… it would be permissible for the State Legislature to tax all thegoods involved in the execution of a works contract at a uniformrate which may be different from the rates applicable to individualgoods because the goods which are involved in the execution of aworks contract when incorporated in the works can be classifiedinto a separate category for the purpose of imposing the tax and auniform rate may be prescribed for sale of such goods”.

The rationale underlying this principle is that goods involved in theexecution of a works contract can be classified into a separate category,so as to provide for a uniform rate of tax. The real issue before thisCourt is as to whether prior to 1 April 2006, the State legislature ofKarnataka had in fact done so. The answer to this is in the negative, ona plain and natural meaning of the words used.

16. The core of the submissions which have been ably projectedbefore the Court by MrDevadattKamat is that the State legislature hadin fact prescribed a uniform rate for works contracts, prior to 1.4.2006in Section 4(1)(b) under which a rate of 12.5% was provided. In hissubmission, declared goods would be assessed separately; while thebalance of the goods in a works contract would be assessed on the totalturnover, which is incorporated under Rule 3(1)(c). We find ourselvesunable to accept the submission. In our view, it would be far-fetched toaccept that in enacting Section 4(1)(b), the legislature intended to prescribea uniform rate of tax, prior to 1.4.2006, for goods incorporated in a workscontract. The scheme legislated upon in Section 4(1) envisaged specificrates of tax on goods falling within the Second, Third and FourthSchedules. What Section 4(1)(b) provided was a residual entry underwhich a rate of 12.5% was provided ‘in respect of other goods’. Theexpression ‘in respect of other goods’ meant goods other than thosefalling in the Second, Third and Fourth Schedules. Declared goodsspecified in Section 14 of the Central Sales Tax Act, 1956 werecomprehended in Serial No.20 of the Third Schedule to the KVAT Act A

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A2003 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 ofproperty in goods involved in the execution of a works contract becomeexigible to tax. Exigibiliy to tax, it is settled law, is distinct from the rateof tax and the measure of the tax. In Gannon Dunkerly& Co, thiscourt expressed the view that it is open to the states to provide a uniformBrate of taxon goods transferred in the course of the execution of aworks contract. The exigibility to tax is not (as it cannot be) dependenton the state prescribing a uniform rate of tax for goods involved in workscontracts. That the KVAT Act 2003 did not provide a uniform rate of taxprior to 01.04.2006 on goods involved in the execution of works contractCalso becomes apparent when we read the amendment which introducedSection 4(1)(c) by Act 4 of 2006. As a result of the amendment, thelegislature provided that the rate of tax in respect of the transfer ofproperty in goods involved in the execution of a works contract wouldbe as provided in the Sixth Schedule. The Sixth Schedule elucidates

works contracts of various descriptions and elucidates the associatedDrates of tax for each distinct category. For declared goods, Section4(1)(c ) is expressly subject to Sections 14 and 15 of the CST Act 1956.Hence declared goods involved in the execution of a works contract aretaxable at the rates mentioned in Section 15 of the CST Act while allother goods involved in the execution of a works contract are taxable atEthe rate prescribed in the Sixth Schedule upon the amendment. Theamendment introducing Section 4(1)(c) took effect on 1 April 2006. Theamendment is not clarificatory. It was with effect from 1 April 2006that the State legislature mandated a uniform rate of tax on goods involvedin the execution of works contracts as provided in the Sixth Schedule.The position as it existed upto 31 March 2006 was altered with effectFfrom 1 April 2006. We are, therefore, unable to accept the submissionof the State that upto 31 March 2006. Section 4(1)(b) envisaged a uniformrate for the transfer of goods involved in the execution of a workscontract. Section 4 imposes the liability to pay tax on every dealer whois or is required to be registered, on his taxable turnover. The concept ofGtaxable turnover in Section 2(34) is defined with reference to the turnoveron which a dealer is liable to be taxed, determined after making deductionsfrom the total turnover as prescribed. The concept of taxable turnoverthus incorporates the expressions ‘turnover’ and ‘total turnover’, bothof which are defined in Sections 2(36) and Section 2(35) respectively.

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The manner in which the total turnover of a dealer is computed isprescribed in Rule 3(1)(b), in the case of a normal sale, and in Rule3(1)(c), for the purposes of a works contract. In the case of a workscontract, deductions are envisaged under sub-rule (2) of Rule 3, whichincludes amounts such as labour and other charges. Section 7 providesthat the sale of goods shall be deemed to have taken place at the time ofthe transfer of title or possession or incorporation of the goods in thecourse of the execution of a works contract. In our view, the interpretationwhich we have placed on the provisions of the Act as they existed priorto 1.4.2006 is consistent with the plain meaning of the words used by thelegislature. We are unable to subscribe to the submission which hasbeen urged on behalf the appellant that Section 4(1)(b), as it existedprior to 1.4.2006 was a catch- all entry providing for a uniform rate oftax on goods involved in the execution of a works contract. Such aconstruction does not emerge from the plain meaning of the wordsusedand is in fact belied by the need which was felt by the legislature toimpose a uniform rate of tax only with effect from 1 April 2006.Beforeconcluding, we need to clarify that the genesis of the present disputearises out of the proceedings which were initiated before AAR by therespondent seeking guidance on the applicable rate of tax on the law asit existed until 31.03.2006. This proceeding concludes the issue ofinterpretation. We clarify, by way of abundant caution, that issues of afactual nature, will fallfor adjudication in the course of assessmentproceedings. It was open to state legislatures to provide uniform rates oftax on goods involved in the execution of works contracts. Many statelegislatures did so. The Karnataka legislature did so with effect from1.4.2006, not earlier.

17. For the above reasons, we find that there is no merit in thechallenge preferred by the State of Karnataka to the impugned judgmentand order of the High Court. The appeal shall, accordingly, standdismissed. There shall be no order as to costs.

CIVIL APPEAL NOS.812-817 OF 2018:

(Arising out of SLP(C )Nos 10570-10575 of 2015)

18. The High Court, by its impugned judgment and order dated 25September 2014 dismissed the Sales Tax Revision Petitions filed underSection 65(1) of the Karnataka Value Added Tax Act 2003 against theorder dated 26 August 2013 of the Karnataka Appellate Tribunal, ABCDE

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ABengaluru. While dismissing the revisions, the High Court relied upon itsearlier decision dated 29 September 2012 in M/s Durga Projects Inc vState of Karnataka (STA 72 of 2010). The appeal filed by the State ofKarnataka (Civil Appeal No.811 of 2018) in the matter of M/s DurgaProjects Inc. has been dismissed by this Court. No separate submissionhas been raised in the present appeals. The appeals are, accordingly,Bdismissed. There shall be no order as to costs.

Nidhi Jain

Appeals dismissed.

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