2018 (3) TMI 162 - SC - VAT and Sales Tax

Rate of tax - uniform rate of tax or different rate of tax on purchase of goods for use in the works contract - rate applicable prior to 1 April 2006 when Section 4(1)(c) was introduced by an amendment into the KVAT Act 2003 - Held that - There can be no manner of doubt that even prior to 1 April 2006 works contracts were exigible to the levy of tax. The charging section, Section 3, mandates that the tax shall be levied on every sale of goods . The expression sale in Section 2(29) means every transfer of the property in goods including a transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract . Section 4 prescribes the rate of tax. - The expression other goods in Section 4(1)(b) evidently means those goods which are not governed by Section 4(1)(a) - where goods are specifically covered by clauses (i), (ii), or (iii) of Section 4(1)(a), recourse to the residual provisions of Section 4(1)(b) would not be available. To allow a residual provision to consume the specific would be to invert the intent of the legislature. The state wants us to do just that. In Gannon Dunkerly & Co 1992 (11) TMI 254 - SUPREME COURT OF INDIA , this Court held that it is permissible for the State legislatures to prescribe a uniform rate of tax for all goods involved in the execution of works contracts, even though different rates of tax are prescribed for the sale of such goods. The exigibility to tax is not (as it cannot be) dependent on the state prescribing a uniform rate of tax for goods involved in works contracts. That the KVAT Act 2003 did not provide a uniform rate of tax prior to 01.04.2006 on goods involved in the execution of works contract also becomes apparent when we read the amendment which introduced Section 4(1)(c) by Act 4 of 2006. As a result of the amendment, the legislature provided that the rate of tax in respect of the transfer of property in goods involved in the execution of a works contract would be as provided in the Sixth Schedule. The Sixth Schedule elucidates works contracts of various descriptions and elucidates the associated rates of tax for each distinct category. By way of abundant caution, that issues of a factual nature, will fall for adjudication in the course of assessment proceedings. It was open to state legislatures to provide uniform rates of tax on goods involved in the execution of works contracts. Many state legislatures did so. The Karnataka legislature did so with effect from 1.4.2006, not earlier. We are unable to accept the submission of the State that upto 31 March 2006. Section 4(1)(b) envisaged a uniform rate for the transfer of goods involved in the execution of a works contract. Appeal dismissed - decided against appellant.

Summary

Issues Involved:
1. Rate of tax applicable to works contracts prior to 1 April 2006 under the Karnataka Value Added Tax Act 2003 (KVAT Act 2003).
2. Interpretation of Section 4(1)(b) and the introduction of Section 4(1)(c) by the amendment effective from 1 April 2006.
3. Determination of taxable turnover and the applicability of residual entry for tax rate determination.

Detailed Analysis:

1. Rate of Tax Applicable to Works Contracts Prior to 1 April 2006:
The primary issue was the rate of tax applicable to works contracts before the amendment of Section 4(1)(c) of the KVAT Act 2003, which came into effect on 1 April 2006. The respondent, engaged in executing civil works contracts, sought clarification on the applicable tax rate. The Authority for Advance Clarification and Ruling (AAR) initially ruled that, in the absence of a specific entry for works contracts, the tax should be levied according to the rate applicable to the sale of individual goods used in the execution of the contract. This was later contested by the Commissioner of Commercial Taxes, who argued that the tax should be levied on the taxable turnover of goods involved in the execution of works contracts, not on individual goods.

2. Interpretation of Section 4(1)(b) and Introduction of Section 4(1)(c):
The State of Karnataka argued that the KVAT Act envisaged a levy of tax on works contracts even before the introduction of Section 4(1)(c). They contended that the rate of tax for works contracts prior to 1 April 2006 fell under Section 4(1)(b), the residual entry, which prescribed a rate of 12.5% for "other goods." The respondent countered that there was no provision for a uniform rate on all goods involved in the execution of works contracts until the amendment. The Supreme Court held that prior to 1 April 2006, the KVAT Act did not prescribe a uniform rate of tax for goods involved in the execution of works contracts. The amendment introducing Section 4(1)(c) and the Sixth Schedule, which specified rates for various works contracts, was effective from 1 April 2006 and was not clarificatory.

3. Determination of Taxable Turnover and Applicability of Residual Entry:
The determination of taxable turnover involved deductions from the total turnover as prescribed by the rules under the KVAT Act. The State argued that the concept of 'total turnover' in a deemed sale (works contract) was distinct from that in a normal sale, and that the rate of tax should be applied to the aggregate value of goods involved in the works contract. The Supreme Court emphasized that the expression 'other goods' in Section 4(1)(b) referred to goods not specified in the Second, Third, or Fourth Schedules. The court reiterated that the residual entry under Section 4(1)(b) could not be applied to goods specifically covered by other entries. The court concluded that the legislature intended to impose a uniform rate of tax on goods involved in works contracts only from 1 April 2006, as evidenced by the amendment.

Conclusion:
The Supreme Court dismissed the appeal by the State of Karnataka, upholding the High Court's judgment that for the period prior to 1 April 2006, the tax on goods used in the execution of works contracts should be levied according to the rates applicable to the sale of individual goods. The court clarified that the amendment introducing a uniform rate of tax for works contracts was effective from 1 April 2006 and was not intended to be retrospective. The appeals related to similar issues were also dismissed, with no order as to costs.