2005 (1) TMI 655 - HC - VAT and Sales Tax

Issues Involved:
1. Classification of the works contract under the Karnataka Sales Tax Act, 1957.
2. Levy of tax on goods brought from outside the State for execution of the works contract.
3. Justification of turnover tax levy on declared goods.

Detailed Analysis:

1. Classification of the Works Contract:
The primary issue was whether the works contract executed by the assessee-company for the Karnataka Electricity Board (KEB) falls under Entry No. 11 of the Sixth Schedule or Entry No. 55 of the Fifth Schedule of the Karnataka Sales Tax Act, 1957.

- Entry No. 11 of the Sixth Schedule: "Supplying and fitting of electrical goods, supply and installation of electrical equipment including transformers."
- Entry No. 55 of the Fifth Schedule: "Transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract other than those specified in the Sixth Schedule."

The assessing authority initially classified the contract under Entry No. 11, treating it as "supply and fittings of electrical goods." The first appellate authority considered it as "supply and installation of electrical equipment." However, the Tribunal concluded that the contract should fall under Entry No. 55 of the Fifth Schedule, as it involved comprehensive tasks such as preliminary and final survey, alignment tower spotting, design, testing, and erection of a 220 KV double circuit transmission line on a turnkey basis, which cannot be equated with mere supply and installation of electrical equipment.

2. Levy of Tax on Goods Brought from Outside the State:
The second issue addressed whether the goods brought from outside the State for execution of the works contract could be subjected to tax under the State law.

The first appellate authority held that goods brought from outside the State for the works contract could not be treated as inter-State sales, as the work was on a total turnkey basis. The Tribunal, referencing the Supreme Court decisions in Gannon Dunkerley & Co. v. State of Rajasthan [1993] 88 STC 204 and Builders Association of India v. Union of India [1989] 73 STC 370, stated that goods brought from outside the State for execution cannot be taxed under State law. However, the Tribunal did not delve deeply into the terms of the contract.

The High Court noted that the determination of whether a deemed sale resulting from the transfer of property in goods involved in the execution of a works contract amounts to an inter-State sale must be based on the specific terms of the contract. Therefore, the matter was remanded back to the Tribunal for fresh consideration, focusing on the contract terms and the principles laid down by the Supreme Court.

3. Justification of Turnover Tax Levy on Declared Goods:
The final issue was whether the levy of turnover tax at 10% on the value of reinforcement steel used in the works contract was justified.

The first appellate authority had reduced the tax rate to 4% for reinforced steel, considering it a declared commodity. The High Court confirmed that the levy of turnover tax on declared goods under the Karnataka Sales Tax Act is not justified, referencing the proviso to Section 6-B of the Act. This issue was resolved in favor of the assessee.

Conclusion:
The High Court partly allowed the revision petitions, modifying the Tribunal's orders to the extent indicated. The matter was remanded to the Tribunal to reconsider the second issue regarding the levy of tax on goods brought from outside the State, based on the specific terms of the contract and the legal principles established by the Supreme Court. The levy of turnover tax on declared goods was ruled in favor of the assessee. Each party was directed to bear its own costs.

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