2012 (7) TMI 854 - HC - VAT and Sales Tax

Whether uniform levy of tax under section 4(1)(c) does not attract in the instant case as it is divisible contract and that for cable wires supplied in works contract, attracts lesser duty at four per cent. and not uniform rate at 12.5 per cent. is bad in law? Held that - Section 4(1)(c) of the KVAT Act was incorporated by amendment with effect from April 1, 2006 when the law specifically authorizes the State to levy uniform tax. It may not be within the competence of the taxing authorities to enter into contract to negate the effect of section 4(1)(c) of the KVAT Act. Section 4 is the charging section, which lays down different tax rates for the goods mentioned in Schedules II to IV. In the case of Gannon Dunkerley 1992 (11) TMI 254 - SUPREME COURT OF INDIA it is categorically held that the State can legislate the law to levy uniform tax. The argument that such levy of uniform tax would be discriminatory and would be in variation with the tax imposed on the particular product if it is not deemed sale under the contract works, is untenable. When the Legislature empowers the taxing authority to levy uniform tax by section 4(1)(c), it is impermissible for the assessee to contend that some of the items supplied in the contract works constitute divisible contract and it should attract less tax is untenable. In that view, the question of law is answered in favour of the petitioner. Revisions allowed.

Summary

Issues:
1. Whether the levy of uniform tax under section 4(1)(c) is applicable in a case where the contract is divisible, and specific rates are mentioned for certain materials?

Analysis:
The case involved an assessee who was engaged in electrical work and filed a return for the assessment year 2006-07. The dispute arose regarding the tax rate applicable to the materials used in the contract. The Assessing Officer (A.O.) determined that the contract work was indivisible, and tax should be levied uniformly on all materials at a particular rate. The appellate authority upheld this decision, but the Tribunal disagreed. The Tribunal considered that as per the contract terms, the price of certain materials like cable wire was separately quoted, making it a divisible deemed sale. Therefore, the levy of uniform tax on cable wire was deemed incorrect.

The State challenged this decision through a revision petition, raising the question of whether the uniform levy of tax under section 4(1)(c) was not applicable in this case due to the contract's divisibility. The Tribunal relied on the Supreme Court's decision in the case of Gannon Dunkerley & Co. v. State of Rajasthan, emphasizing the distinction between agreements for material transfer and service remuneration. The Tribunal found that since specific rates for cable wire were mentioned in the contract, it constituted a divisible contract, making the uniform tax levy incorrect under section 4(1)(c) of the KVAT Act.

The Supreme Court's decision in Gannon Dunkerley & Co. v. State of Rajasthan outlined key conclusions regarding the taxation of property transfer in works contracts. It clarified the legislative power to impose tax and the determination of tax value based on goods involved in the contract. The judgment emphasized that the State Legislature cannot define a sale in a way that exceeds its taxing power, especially in inter-State trade or commerce scenarios. It also allowed for the fixing of a uniform tax rate for various goods in works contracts, distinct from individual sales tax rates.

The Court noted that the KVAT Act's section 4(1)(c) allowed for the levy of a uniform tax, and the legislative amendment authorized such taxation from April 1, 2006. The judgment highlighted that the State's power to legislate and levy uniform tax cannot be circumvented by contract terms. It reiterated that the State can impose a uniform tax rate despite variations in tax rates for specific products under a contract. Therefore, the Court held that the levy of uniform tax under section 4(1)(c) was valid, rejecting the argument for lower tax rates on divisible contract items. The revisions were allowed in favor of the petitioner based on these legal interpretations.