M/S CRAFT INTERIORS (P) LTD. versus THE JOINT COMMISSIONER OF COMMERCIAL TAXES (INTELLIGENCE) & ANR. on 2 July 2019

[2019] 8 S.C.R. 899

M/S CRAFT INTERIORS (P) LTD.

v.

THE JOINT COMMISSIONER OF COMMERCIAL TAXES(INTELLIGENCE) & ANR.

(Civil Appeal No. 8898 of 2011)

JULY 02, 2019

[A. M. KHANWILKAR AND AJAY RASTOGI, JJ.]

Karnataka Sales Tax Rules, 1957:

r. 6(4)(m)(i) r/w. Explanation to r. 6(4) – Constitutional validityof – Whether the rule ovesteps the substantive/charging provisioni.e. s.5B of the Sales Tax Act – Held: Rule 6(4)(m)(i) and s.5B of theAct operate in different fields – Section 5B is charging provisionwhile r. 6(4)(m)(i) is a provision for deduction from tax – Rule6(4)(m)(i) r/w. Explanation III is in clear consonance with thecharging provision i.e. s. 5B – In the present case eligibility of theassessee u/r. 6(4) is a clear question of fact which has to bedetermined in the assessment proceedings – Karnataka Sales TaxAct, 1957 – s. 5B.

Dismissing the appeal, the Court

HELD : 1.1 Section 5B of Karnataka Sales Tax Act, 1957and Rule 6(4)(m)(i) of the Karnataka Sales Tax Rules, 1957operate in different spheres. Section 5B is a charging provisionfor levy of sales tax whereas Rule 6(4)(m)(i) is a provision fordeduction from tax. Under Section 5B, tax can be levied ontransfer of property in the goods whether as goods or in someother form whereas Rule 6(4)(m)(i) provides for a deduction inrespect of the goods which have already suffered tax and whichare used in the same form. Thus, it appears to be in clearconsonance with the charging provision and does not militateagainst Section 5B of the Act, 1957. [Para 19] [907-C-D]

1.2 What emerges from the scheme of the Act and Rulesframed thereunder is that Rule 6(4)(m)(i) purports to grant benefitto the assessee by allowing deductions for the value of goods

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Awhich have already suffered taxation and which goods substantiallyretain their original identity while being used in the execution ofa works contract. Explanation III to Rule 6(4) clarifies it furtherby categorically providing that in case the goods are transformedinto a different commodity which then is used in the execution ofworks contract, then the benefit of deduction cannot be availed.BIt is trite law that tax provisions granting exemptions/concessionsare required to be strictly construed. There is no variancebetween Rules 6(4)(m)(i) read with Explanation III and Section5B of the Act. [Paras 24, 25 and 26] [909-C-F]

State of Tamil Nadu v. Pyare Lal Malhotra and OthersC(1976) 1 SCC 834 : [1976] 2 SCR 168 ; VasanthamFoundry v. Union of India and Others (1995) 5 SCC289 : [1995] 2 Suppl. SCR 575 ; B. Narasamma v.Deputy Commissioner of Commercial Taxes, Karnatakaand Another (2016) 15 SCC 167 : [2016] 7 SCR 760 ;DTelangana Steel Industries and Others v. State of A.P.and Others (1994) Supp. 2 SCC 259 : [1994] 2 SCR324 – relied on.

Media Communications v. Government of AndhraPradesh 1997 (105) STC 227 (AP) – held inapplicable.

EE.C.I.E. Pvt. Ltd. v. Additional Deputy Commissioner,Commercial Taxes (Kar.)and Another 1999 (114) STC309 – referred to.

2. So far as the five impugned notices of provisionalassessment served under Section 28(6) of the Act is concerned,Fwhether the assessee was eligible under Rule 6(4)(m)(i) is aquestion of fact which has to be determined in the assessmentproceedings and since the provisional assessment has not beenfinalised due to pendency of the instant proceedings, it may notbe advisable for this Court to dilate on the subject issue of theGnotices served upon the appellant at this stage and leave it opento the appellant to address before the assessing authorityin the pending appropriate assessment proceedings, if so advised.[Para 29] [910-F-G]

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M/s. Achal Industries v. State of Karnataka AIR 2019SC 1653 – referred to.

Case Law Reference

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 8898of 2011.

From the Judgment and Order dated 16.09.2006 of the HighCourt of Karnataka at Bangalore in Writ Appeal No. 1874 of 2003 (T-KST).

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Ms. Charanya Lakshmikumaran, Shanthakukmar Mahale, AadityaBhattacharya, Ms. Apeksha Mehta, Victor Das, Manish Rastogi, RajeshMahale, Advs. for the Appellant.

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Devadatt Kamat, Sr. Adv./AAG, V.N. Raghupathy, JavedurRahman, Rajesh Inamdar, Aditya Bhat, Manendra Pal Gupta, Advs.for the Respondents.

The Judgment of the Court was delivered by F

RASTOGI, J.

1 The civil appeal arises out of the judgment of the Division Benchof the High Court of Karnataka dismissing the writ petition and upholdingthe validity of Rule 6(4)(m)(i) of the Karnataka Sales Tax Rules,1957(hereinafter referred to as “KST Rules”) read with Explanation IIIto Rule 6(4) of the said rules.

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2. The question which has been raised in the instant appeal iswhether the condition of ‘use in the same form in which such goods arepurchased’ under Rule 6(4)(m)(i) of the KST Rules expands the scope H

Aof charging section i.e. Section 5B under KST Act, 1957.

3. The brief facts of the case relevant for the purpose are that theappellant is a private limited company engaged in the business of interiordecoration and other types of work. The appellant had purchased variousgoods from registered dealers under the KST Act, 1957 and used themBin the execution of works contracts. The appellant claimed deductionfrom the total turnover of such purchases in terms of Rule 6(4)(m)(i) ofthe KST Rules, 1957 as per which all amounts received or receivable inrespect of goods purchased from registered dealers and used in theexecution of works contracts in the same form in which goods arepurchased, can be claimed as deduction from the total turnover.

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4. The assessing Officer issued notices for provisional assessmentfor the years 1998-99, 1999-2000, 2000-2001, 2001-2002 and 2002-2003to deny the deduction of the value of timber, purchased from the localregistered dealers claimed under Rule 6(4)(m)(i) on the ground that thetimber was not used in the same form in which such goods wereDpurchased, while executing the works contract. It was further observedthat for carrying out the interior decoration, the appellant purchased timberin log forms, plaster of paris, plywood, glass sheets and the said purchaseshave been manufactured to produce the goods which are necessary forinterior decoration. The Assessing Officer further observed that as perERule 6(4)(m)(i), the registered dealer purchases deductible from the workscontract receipts is limited to transfer of the purchased goods in thesame form. As per Explanation III of the said Rule “in the same form”do not include the registered dealer purchases which are either consumedor manufactured of other goods which are used in the execution of theFworks contract. Hence, there shall be no deductions as claimed.

5. It has been informed to this Court that five notices were issuedby the Assessing Officer on 8[th] November, 2002 for different assessmentyears under Section 28(6)(iii) of the KST Act, 1957 and reply wassubmitted by the appellant but the matter has not been proceededGthereafter any further because of pendency of the litigation. Beingaggrieved, the appellant preferred writ petition, assailing the five showcause notices served upon the appellant/assessee and also theconstitutional validity of Rule 6(4)(m)(i) read with Explanation III toRule 6(4) of the said rules.

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6. The writ petition came to be dismissed by the learned SingleJudge of the High Court vide its Order dated 7[th] January, 2003 placingreliance on the judgment of E.C.I.E. Pvt. Ltd.Vs. Additional DeputyCommissioner, Commercial Taxes(Kar.) and Another1999(114) STC309 in which the High Court of Karnataka has upheld the constitutionalvalidity of the said Rule. So far as the order of the Joint Commissionerof Commercial Taxes (Intelligence) dated 6[th] November, 2002 isconcerned, granted permission to the authority to take up the provisionalassessment in furtherance to the notices dated 8[th] November, 2002 andto pass an appropriate order after hearing the parties in accordance withlaw. Against the Order of the learned Single Judge dated 7[th] January,2003, the unsuccessful appellant preferred LPA which also came to bedismissed with supportive reasons vide judgment impugned dated 16[th]September, 2006 which is a subject matter of challenge in appeal beforeus.

7. The main thrust of submission of the learned counsel for theappellant, Mr. Charanya Lakshmikumaran, is that the condition underRule 6(4)(m)(i) of goods purchased be used “in the same form” is beyondthe charging section(Section 5B) of the KST Act, 1957. The chargingsection does not restrict the form in which the goods are to be transferredin a works contract. However, the Rule restricts the deduction availableon the form in which the goods are used in the execution of workscontract. According to learned counsel, the Rule referred to isoverstepping the substantive provision being unconstitutional is liable tobe struck down.

8. Learned counsel further submits that the High Court of AndhraPradesh in the case of Media CommunicationsVs. Government ofAndhra Pradesh1997(105) STC 227(AP) struck down a pari materiaprovision (Section 5F of the A.P. General Sales Tax Act, 1957) on thepremises that the said levy is contrary to the single point system of taxand cannot be accepted. Appeal filed by the Government of AndhraPradesh against the said Order in SLP(C ) Nos. 6804-6849 of 1998 hasbeen dismissed by this Court on 29[th] October, 1998 and in the light of thejudgment of the High Court of Andhra Pradesh, Rule 6(4)(m)(i) readwith Explanation III is not sustainable and deserves to be quashed.

9. Learned counsel further submits that provisional assessmentunder Section 28 of the KST Act cannot be invoked unless there is an A

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Aassessment pending either for finalisation or assessment for escapedturnover under Section 12A for the assessment years 1998-1999 and1999-2000. The assessment stood finalised on 25[th] February, 2002. Thenotice for provisional assessment was issued on 8[th] November, 2002. Inthe given circumstances, there was no occasion to invoke Section 28when notice should have been issued under Section 12A, if upon goingBthrough the records and the books of accounts, the assessing officers/intelligence officers felt that the deduction under Rule 6(4)(m)(i) hasbeen wrongly allowed and hence the turnover of the appellant has escapedassessment.

10. According to the learned counsel, in the present case, no noticeCwas issued under Section 12A for the assessment years 1998-1999 and1999-2000 and further assessments under Section 12 had already beenfinalised. Thus, Section 28(6) of the Act could not have been invokedsince there was no pending assessment which sought to be revised byway of the provisional assessment. At least for the two assessment Dyears, the very action initiated by the respondent is not in conformitywith the mandate of law and deserves to be interfered with by this Court.

11. Per contra, Mr. Devadatt Kamat, learned AAG supportingthe judgment of the High Court submits that Section 5B of the KST Actand Rule 6(4)(m)(i) of KST Rules operate in different spheres. SectionE5B is a charging provision for levy of sales tax, whereas Rule 6(4)(m)(i)is a provision for deduction. Under Section 5B, tax can be levied ontransfer of property in goods (whether as goods or “in some other form”),whereas Rule 6(4)(m)(i) provides for a deduction in respect of goodswhich have already suffered tax and which are used “in the same form”.FThus, Rule 6(4)(m)(i) is in conformity with the charging provision anddoes not militate against charging Section 5B and submits that the verycontention advanced by the appellant is misconceived and has beenexamined by the High Court in the impugned judgment needs no furtherconsideration by this Court.

G12. Learned counsel further submits that Explanation III appendedto Rule 6(4) clarifies the expression “in the same form” used in Rule6(4)(m)(i) and the same goods can be taxed only once and the samegoods cannot be made subject matter of multiple incidence of tax.However, if the goods which have suffered taxation undergoes H

transformation into a different commodity altogether and is then used inthe execution of a works contract, the same being a different commercialcommodity, is indeed liable to be taxed and this being in the domain ofthe legislative competence of the authority cannot be held to be ultravires as prayed for.

13. Learned counsel further submits that the judgment of MediaCommunicationsVs. Government of Andhra Pradesh(supra) is whollymisplaced. In Media Communications(supra), the High Court reliedonTelangana Steel Industries and OthersVs. State of A.P. and Others1994 Supp(2) SCC 259 and recorded a finding that the first and secondproviso to Section 5F of the A.P. General Sales Tax Act are ultra viresof the main provision. The fact is the High Court in MediaCommunications(supra) failed to notice that this Court in TelanganaSteel Industries and Others(supra) has held that ‘if two goods at handbe different commodities”, the single point taxing principle would notdebar realisation of tax once again.’ This what has been observed wouldnot be construed as finding in affirmance in Media Communicationscase(supra) merely on dismissal of the special leave petition(s) preferredby the State of Andhra Pradesh.

14. Learned counsel further submits that whether the assessee/appellant was eligible under Rule 6(4)(m)(i) is a question of fact whichwill have to be determined in pending proceedings initiated pursuant tothe impugned notices served upon the appellant. Since the provisionalassessment has not been finalised due to the pendency of the instantproceedings, the Department be given liberty to complete theseproceedings obviously in accordance with law.

15. We have heard learned counsel for the parties and with theirassistance perused the material available on record.

16. Before we proceed with the matter further, it will be appositeto take note of the relevant provisions of the KST Act, 1957 and KSTRules, 1957:- “5-B. Levy of tax on transfer of property in goods (whetheras goods or in some other form) involved in the executionof works contracts.- Notwithstanding anything contained in sub-section (1) or sub-section (3) or sub-section (3-C) of section 5, A

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but subject to sub-section (4), (5) or (6)] 2 of the said section,every dealer shall pay for each year, a tax under this Act on histaxable turnover of transfer of property in goods (whether as goodsor in some other form) involved in the execution of works contractmentioned in column (2) of the Sixth Schedule at the rates specifiedin the corresponding entries in column (3) of the said Schedule.”

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“6(4). In determining the taxable turnover, the amount specifiedin clauses (a) and (p) shall, subject to the conditions specifiedtherein, be deducted from the total taxable turnoverof a dealer asdetermined under clauses (a) to (e) of sub-rule (1).

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(m) . in the case of works contract specified in serial numbers1,2,3,4,5,6,7,8,9,10, 11,12,17,26,27,35,36,40 and 42 of the SixthSchedules:

(i) All amounts received or receivable in respect of goodsother than the goods taxable under sub-section (1A) or (1B)of section 5 which are purchased from registered dealersliable to pay tax under the Act and used in the execution ofworks contract in the same formin which such goodsare purchased.”

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17. Explanation III to Rule 6(4) of the KST Rules, which clarifiesthe expression “in the same form” used in Rule6(4) (m)(i) reads asunder:

“Explanation III: For the purposes of sub-rule (4), the expression“in the same form” used in sub-clause (i) of clause (m) shall notinclude such goods which, after being purchased, are eitherconsumed or used in the manufacture of other goods which inturn are used in the execution of works contract.”

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(emphasis added)

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18. From the bare perusal of the provision of the KST Act andKST Rules, 1957 indicated above, it clearly envisages that Section 5B ofthe KST Act is a charging provision which empowers the State to levytax on the transfer of property in goods involved in works contract. AtHthe same time Rule 6(4)(m)(i) read with Explanation III to Rule 6(4) of the KST Rules clarifies that the same goods can be taxed only once andcannot be made subject matter of multiple incidence of tax and the goodswhich have suffered taxation undergoes transformation into a differentcommodity altogether and is then used in the execution of a workscontract, the same being a different commercial commodity is liable tobe taxed. The justification which has been tendered by the appellant inreference to five notices impugned in the instant proceedings for theassessment years 1998-1999 to 2002-2003 is a question of fact to beexamined by the assessing authority who has served him the notices.

19. We are clear, in our view, that Section 5B of the KST Act andRule 6(4)(m)(i) of the KST Rules operate in different spheres. Section5B is a charging provision for levy of sales tax whereas Rule 6(4)(m)(i)is a provision for deduction from tax. Under Section 5B, tax can belevied on transfer of property in the goods whether as goods or in someother form whereas Rule 6(4)(m)(i) provides for a deduction in respectof the goods which have already suffered tax and which are used in thesame form. Thus, in our view, it appears to be in clear consonance withthe charging provision and does not militate against Section 5B of KSTAct, 1957.

20. This Court in State of Tamil NaduVs. Pyare Lal Malhotraand Others1976(1) SCC 834 has held that if the separate commercialcommodities emerge out of the goods already taxed earlier, the newcommercial commodity is liable to sales tax provided there is a law tothis effect. The relevant para is as under:-

“10. As we all know, sales tax law is intended to tax sales ofdifferent commercial commodities and not to tax the productionor manufacture of particular substances out of which thesecommodities may have been made. As soon as separatecommercial commodities emerge or come into existence, theybecome separately taxable goods or entities for purposes of salestax. Where commercial goods, without change of their identity assuch goods, are merely subjected to some processing or finishingor are merely joined together, they may remain commerciallythe goods which cannot be taxed again, in a series of sales,so long as they retain their identity as goods of a particulartype.”

(Emphasis supplied)

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A21. Taking note of the exposition of legal principles laid down inPyare Lal Malhotra and Others(supra), it brings out two basic principlesgoverning sales tax law:

i.Sales tax can be levied on the same goods only once so longas they retain their identity of goods of a particular type, and B

ii.If separate commercial commodities emerge out of the (goodsalready taxed earlier), then the said new commercialcommodity is liable to sales tax.

This is what has been conferred in Rule 6(4)(m)(i) read withExplanation III to Rule 6(4) of which a reference has been made.C

22. In Vasantham FoundryVs. Union of India and Others1995(5) SCC 289, this Court reiterated the Pyare Lal Malhotra andOthers(supra) principle in para 25 as under:- “25. Therefore, in our view “cast iron casting” in its basic orDrough form must be held to be ‘cast iron’. But, if thereafter anymachining or polishing or any other process is done to the roughcast iron casting to produce things like pipes, manhole covers orbends, these cannot be regarded as “cast iron casting” in itsprimary or rough form but products made out of cast iron castings.Such products cannot be regarded as ‘cast iron’ and cannot beEtreated as “declared goods” under Section 14(iv) of the CentralSales Tax Act. This view is not in conflict with the view taken inthe case of Bengal Iron Corpn. [1994 Supp (1) SCC 310: (1993)90 STC 47], but it is in consonance with the decision in that case.”

23. The same principle has been recently reiterated in B.FNarasammaVs. Deputy Commissioner of Commercial Taxes,Karnataka and Another2016(15) SCC 167. In para 18 thereof, theprinciple ofPyare Lal Malhotra and Others(supra) quoted hereinaboveis considered. Rule 6(4)(m)(i) came up for consideration in B.Narasamma(supra) where this Court after noting the said Rule cameGto the conclusion in para 23 as under:- “23. On facts in this case, it has been found that the appellant isengaged in works contracts of fabrication and creation of doors,window frames, grills, etc. in which they claimed exemption for M/S CRAFT INTERIORS (P) LTD. v. THE JOINT COMM. OFCOMMERCIAL TAXES (INTELLIGENCE) [RASTOGI, J.]

iron and steel goods that went into the creation of these items,after which the said doors, window frames, grills, etc. were fittedinto buildings and other structures. On facts, therefore, we findthat the High Court’s judgment [State of Karnataka v. AnantEngg. Words, 2006 SCC OnLine Kar 840] is correct and doesnot need to be interfered with inasmuch as the iron and steelgoods, after being purchased, are used in the manufacture of othergoods, namely, doors, window frames, grills, etc. which in turnare used in the execution of works contracts and are thereforenot exempt from tax.”

24. What emerges from the scheme of the Act and Rules framedthereunder is that Rule 6(4)(m)(i) purports to grant benefit to the assesseeby allowing deductions for the value of goods which have already sufferedtaxation and which goods substantially retain their original identity whilebeing used in the execution of a works contract. Explanation III to Rule6(4) clarifies it further by categorically providing that in case the goodsare transformed into a different commodity which then is used in theexecution of works contract, then the benefit of deduction cannot beavailed.

25. It is trite law that tax provisions granting exemptions/concessions are required to be strictly construed as recently held by thisCourt in M/s. Achal Industries Vs. State of Karnataka AIR 2019 SC1653.

26. In our considered view, there is no variance between Rules6(4)(m)(i) read with Explanation III and Section 5B of the KST Act,1957 and what is contended by the appellant in assailing the validity ofRule impugned hereunder is misconceived and without substance.

27. The judgment in Media Communications(supra) of whichthe learned counsel for the appellant has placed heavy reliance is of noassistance for the reason that mere rejection of special leave petitionsby this Court at the motion stage would not be considered to be anapproval of the view expressed by the High Court of Andhra Pradesh.That apart, para 7 of the judgment in Telangana Steel Industries andOthers case(supra) has been noticed by the High Court in MediaCommunications(supra) and arrived to the conclusion that Telangana A

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ASteel Industries and Others(supra) lent support to the reasoning of theHigh Court.

28. Para 7 of the judgment of this Court in Telangana SteelIndustries and Others(supra) in fact disseminate the reasoning recordedby the High Court in Media Communications(supra) to invalidate theBfirst and second proviso to Section 5B.

“7. The above shows complexity of the concept of a differentcommercial product coming into existence because ofmanufacturing process undertaken. It is because of this that wedo not propose to decide the controversy at hand, which is whetherCiron wires are separate commercial goods from wire rods fromwhich they are produced, by trying to answer whether they areone commercial commodity or separate. The point has howeverarisen for consideration because we are concerned with asingle point sales tax, which would not allow taxing of thesame commodity again. It is also not in dispute that if theDtwo goods at hand be different commodities, the single pointtaxing principle would not debar realisation of tax onceagain from the sale of wires. Shri Tarkunde’s whole emphasisis that goods in question cannot be regarded as two differentcommercial commodities. Let it be seen why this stand has beenEtake by the learned counsel on behalf of the appellants and whetherthe same is sound?”

29. So far as the submissions made by the learned counsel for theappellant on merits in reference to the five impugned notices of provisionalFassessment served under Section 28(6) is concerned, whether theassessee was eligible under Rule 6(4)(m)(i) is a question of fact whichhas to be determined in the assessment proceedings and since theprovisional assessment has not been finalised due to pendency of theinstant proceedings, it may not be advisable for this Court to dilate on theGsubject issue of the notices served upon the appellant at this stage andleave it open to the appellant to address before the assessing authority inthe pending appropriate assessment proceedings, if so advised.

30. Consequently, in our considered view, the appeal is withoutsubstance and accordingly dismissed. It will be open for the assessingH

authority to proceed with the impugned assessment proceedings initiatedpursuant to notices dated 8[th] November, 2002 independently without beinginfluenced/inhibited by the observations made by us and conclude it,after affording opportunity of hearing to the appellant, expeditiously inaccordance with law. No costs.

31. Pending application(s), if any, stand disposed of.

Kalpana K. Tripathy

Appeal dismissed.

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