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2014 (7) TMI 112 - HC - VAT and Sales TaxValuation - works contract - Disallowance of deduction of gross profit at 27.44% on labour charges - Availment of deduction of 30% towards labour charges under Rule 6(4)(n)(v) of the table of KST Rules - Held that - profit earned by the Contractor to the extent it is relatable to supply of labour and service as a permissible deduction for the purpose of arriving at the taxable turnover of the works contractor - further that profit attributable to labour and like charges are separate permissible deductions. Appellant had executed various works contracts during the relevant assessment years. The assessee was not in a position to show the actual amount that he had incurred towards the labour and like charges and therefore, he has adopted standard rate of deduction provided under Rule 6(4)(n)(v) and claimed deduction of 30% on its contract receipt towards the labour and like charges. As per Explanation -II, the appellant had apportioned the gross profit earned by it between the value of goods transferred and labour and like charges. The Assessing Authority after considering the relevant provision of the law allowed the deductions. However, the Revisional Authority without critically examining the matter held that when the assessee availed the deduction of 30% towards labour charges under Rule 6(4)(n)(v) they are not entitled for deduction of 27.44% of gross profit on labour charges. Hence, the order passed by the Revisional Authority insofar as denial of the appellant s claim of deduction of gross profits attributable to labour and like charges under Rule 6(4)(n) of the KST Rules read with Explanation-II appended thereto is not sustainable in law - Decided in favour of assessee.
Issues Involved:
1. Disallowance of deduction of gross profit at the rate of 27.44% in addition to the standard deduction of 30% towards labor and like charges. 2. Disallowance of exemption claimed on export under Section 5(1) of the CST Act. Detailed Analysis: 1. Disallowance of Deduction of Gross Profit: The appellant, a Private Limited Company engaged in civil works contracts, filed annual returns for the assessment years 2003-04 and 2004-05, declaring total and taxable turnover under both KST and CST Acts, and claimed certain deductions and exemptions. The Assessing Authority found discrepancies and issued a notice proposing to disallow certain deductions. After considering the appellant's objections, the Assessing Authority concluded the assessment, allowing deductions towards labor and like charges at 30% of the contract receipt and gross profit at 27.44% on labor charges. The appellant contended that the denial of these deductions was contrary to law. The First Appellate Authority allowed the appeal in part, permitting certain claims under the KST Act and fully under the CST Act. The Additional Commissioner of Commercial Taxes, upon scrutiny, found the orders erroneous and prejudicial to the Revenue, initiating suo motu proceedings to revise the orders. The Revisional Authority, after considering the objections, reviewed and remanded some issues for fresh examination. The appellant challenged the disallowance of the deduction of gross profit at 27.44% in addition to the standard 30% deduction towards labor and like charges. The court analyzed the relevant provisions of the KST Act and Rules. Section 5B is the charging provision, which mandates tax on the value of goods transferred in execution of works contracts. Rule 6(4)(n) allows deductions for labor and like charges, either through actual expenditure or a standard rate (30% for civil works). Explanation-II to Rule 6(4)(n) stipulates that gross profit earned shall be apportioned between the value of goods and labor charges. The appellant, unable to show actual labor charges, claimed the standard deduction of 30% and apportioned the gross profit accordingly. The Revisional Authority, however, held that the appellant was not entitled to both deductions. The court, referencing the Supreme Court's ruling in Gannon Dunkerley & Co. v. State of Rajasthan, clarified that gross profit attributable to labor and like charges is a permissible deduction. The court found that Explanation-II applies to Rule 6(4)(n) as a whole, including sub-rule (v), allowing for the deduction of gross profit in addition to the standard labor charges. The court concluded that the Revisional Authority's denial of the deduction was not sustainable in law and answered the first question in favor of the appellant. 2. Disallowance of Exemption Claimed on Export: The appellant did not press the second question of law regarding the disallowance of exemption claimed on export under Section 5(1) of the CST Act. Conclusion: The court allowed the appeals in part, setting aside the order of the Additional Commissioner of Commercial Taxes insofar as the denial of deduction of gross profit towards labor and like charges. The second question was dismissed as not pressed.
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