2013 (12) TMI 1586 - HC - VAT and Sales Tax

Works contract of civil works - iron and steel - classification of goods - taxable at 4% or 12.5%? - Held that - Merely because iron and steel are cut into a particular length depending on the requirement and they are bound by wire and converted into a particular shape, the iron and steel do not lose their original characteristics. It continues to be the same product. Even after these beams, pillars, roofs are cast, the rod and steel continues to be in the same position in the buildings or the bridge which is constructed. At no point of time the iron and steel is transformed into a new product/ goods. There is no value addition to the said steel rods and beams. In fact, steel rods and beams. In fact, steel rods are used only to reinforce the cement concrete. It is used because it is iron and steel rod and it continues to be iron and steel rod even after the completion of the building or the bridge which is constructed, in which these iron and steel rods are used. Therefore, it continues to be the declared goods. By virtue of Section 15 of the CST Act, the state has an authority to impose tax. It cannot impose tax more than the tax prescribed in Section 15 of the Act - the Assessing Authority was justifies in levying on these iron and steel rods at 4%. Point of taxation - Held that - the sale of goods takes place either by transfer of title or by delivery of possession or at the tome of incorporation of the goods in the course of execution of any works contract. It is a deeming provision. Therefore for any amount to be included in the turnover, the condition precedent in there should be a sale or delivery of possession or incorporation of the goods in the course of execution of any works contract. If none of these events have happened, there is no turnover, If consideration of entering into the works contract, if amounts are paid in advance as mobilization advance, that amount is paid to the contractor to take steps to execute the work. On the date of amount is paid, the contractor neither transfers title in the property nor delivers possession nor incorporates any goods in the work. Therefore the question of treating the advance amount paid as part of consideration for transfer of property in goods would not become turnover and therefore the explanation added to Rule 3 with the object of levying sales tax on advance receipt runs counter to the aforesaid statutory provisions as well as the constitutional provisions. Tax on bullet tanks - Held that - the steel plates before it was incorporated has undergone the process of manufacture and ceased to be the steel plates and it has been taken the form of either section or bullet tank. Therefore, the value of the steel plates at the time of acquisition is not the same at the time of incorporation. It was the declared goods at the time of acquisition. It ceased to be declared goods at the time of incorporation. Before incorporation. Before incorporation there is value addition to the steels plates by the process of manufacture. Therefore, the prohibition contained under section 15 of the CST is not attracted and the state legislature has the power to levy tax in terms of Item No.23 of Sixth Schedule on these goods as it does not fall within any of the categories mentioned from Item Nos. 1 to 22 and also for the reason that it is not a declared goods as stipulated under section 14 of the CST Act - the authorities were justified in levying tax at 12.5% in terms of Item No.23 of Sixth Schedule on the bullet tanks. Appeal allowed - decided partly in favor of appellant.

Issues Involved:
1. Competence of State Government to levy tax on declared goods involved in works contracts.
2. Inclusion of advance payments in turnover under KVAT Rules.
3. Validity of tax levied on transformed goods used in works contracts.

Issue-Wise Detailed Analysis:

1. Competence of State Government to Levy Tax on Declared Goods:
The primary issue was whether the State Government could levy tax on declared goods (iron and steel) used in works contracts at a rate higher than 4% as prescribed under Section 14 of the Central Sales Tax (CST) Act, 1956. The court held that iron and steel, even if used in a different form in the execution of works contracts, retain their character as declared goods. Therefore, the state cannot levy a tax higher than 4% on such goods. The court emphasized that the nature of the goods at the time of incorporation into the works contract is crucial. If the goods retain their original form, they are subject to the limitations imposed by Section 15 of the CST Act, which restricts state taxation to 4%.

2. Inclusion of Advance Payments in Turnover:
The court examined the validity of the explanation added to Rule 3(1) of the KVAT Rules, which mandated the inclusion of advance payments in the total turnover for tax purposes. The explanation was challenged as being ultra vires. The court held that turnover should only include amounts received as consideration for the sale of goods, which occurs at the time of transfer of title, possession, or incorporation of goods in the works contract. Since advance payments do not constitute a sale, their inclusion in turnover was deemed unconstitutional. The court upheld the learned single judge's decision that the explanation to Rule 3(1) was contrary to Section 7 of the KVAT Act and Article 366(29A)(b) of the Constitution.

3. Validity of Tax Levied on Transformed Goods:
The court considered whether the transformation of M.S. plates into sections for mounded LPG storage systems (bullet tanks) changed their character, thus allowing the state to levy a higher tax rate. The court found that the M.S. plates underwent a manufacturing process, transforming them into a different commercial product (bullet sections) before incorporation into the works contract. Consequently, these transformed goods were no longer classified as declared goods, and the state could levy a tax at 12.5% under Item No. 23 of the Sixth Schedule of the KVAT Act. The court upheld the authorities' decision to impose this higher tax rate on the bullet tanks.

Conclusion:
The court's judgment addressed the three key issues comprehensively:
- The state cannot levy more than 4% tax on declared goods (iron and steel) used in works contracts unless the goods are transformed into a different commercial product.
- The inclusion of advance payments in turnover for tax purposes was declared unconstitutional.
- Transformed goods used in works contracts, such as bullet tanks, can be taxed at a higher rate as they are no longer considered declared goods.

The court's decision clarified the application of tax laws concerning declared goods and works contracts, ensuring compliance with constitutional provisions and statutory limitations.

← Previous Next →