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2014 (6) TMI 589 - HC - VAT and Sales TaxInter-State purchases of goods used in the execution of works contract - Denial of exemption claim - The goods were procured from outside the State - in the contract it clearly mentioned that the assessee would procure the goods only from within the State. - revenue contended that, movement of goods from outside the State was not a result of the contract or incidental to the contract, since the General Conditions of Contract did not mention about inter-State vendors and, therefore, it cannot be stated that the goods were moved in pursuance of the contract. Held that - It is now well settled that if a contract of sale contains a stipulation for such movement, the sale would, of-course, be a inter-State trade. But it can also be inter- State sale even if the contract of sale does not itself provide for movement of goods from one State to another but such movement would be result of a covenant in the contract of sale or is an incident of such contract. (See Union of India vs. Khosla and company 1979 (3) TMI 176 - SUPREME COURT OF INDIA ). It is true, in the instant case, the contract of sale did not require or provide that goods should be moved from other States to the State of Karnataka at Bijapur. But it is not true to say that for the purpose of Section 3(a) of the Central Act it is necessary that the contract of sale must itself provide for and cause the movement of goods or that the movement of goods must be occasioned specifically in accordance with the terms of the contract of sale. A sale which occasions movement of goods from one State to another is a sale in the course of inter-State trade, no matter in which State the property in goods passes. It is not necessary that the sale must precede the inter-State movement in order that the sale may be deemed to have occasioned such movement, and it is also not necessary for a sale to be deemed to have taken place in the course of inter-State trade or commerce, that the covenant regarding inter-State movement must be specified in the contract itself. It would be sufficient if the movement was in pursuance of and incidental to the contract of sale. In the present case the movement of goods from one State to another may or may not be as a result of a covenant but definitely it was an incident of the contract. - Decided in favour of assessee.
Issues Involved:
1. Whether the turnover pertaining to inter-State purchases of goods used in the execution of works contract is liable to tax under Section 5-B of the Karnataka Sales Tax Act, 1957. 2. Whether the assessee is entitled for exemption from tax on inter-State purchases of goods used in the execution of works contract under Section 5-B of the Act. Detailed Analysis: Issue 1: Whether the turnover pertaining to inter-State purchases of goods used in the execution of works contract is liable to tax under Section 5-B of the Karnataka Sales Tax Act, 1957. The core issue revolves around whether the inter-State purchases of goods used in the execution of a works contract are taxable under Section 5-B of the Karnataka Sales Tax Act, 1957. The assessee contended that the goods procured in the course of inter-State trade were already taxed under the Central Sales Tax Act and thus should not be taxed again under Section 5-B of the Karnataka Act. The Second Revisional Authority, however, revised the earlier order and brought the turnover pertaining to inter-State purchases under the tax net, arguing that the goods were stored by the assessee and not directly used in the works contract, thus not qualifying as an inter-State sale under Section 3(a) of the Central Sales Tax Act. The court examined various precedents, including K.G. Khosla & Co. (P) Ltd. vs. Deputy Commissioner of Commercial Taxes, where it was held that the movement of goods from one state to another as an incident of the contract qualifies as an inter-State sale. The court also referred to Indure Ltd. vs. C.T.O. and others and Union of India vs. Khosla and Company Ltd., which reiterated that the movement of goods incidental to the contract suffices for it to be considered an inter-State sale. The court concluded that the movement of goods from other states to Karnataka was indeed an incident of the contract between the assessee and KPTCL. The goods were procured with the approval of KPTCL, inspected, and delivered directly to the project site, thus satisfying the criteria for an inter-State sale. Issue 2: Whether the assessee is entitled for exemption from tax on inter-State purchases of goods used in the execution of works contract under Section 5-B of the Act. The court analyzed the definition of "taxable turnover" under Section 2(u-1) of the Karnataka Sales Tax Act, which explicitly excludes the turnover of purchases or sales in the course of inter-State trade or commerce. It also examined the definition of "total turnover" under Section 2(u-2), which includes the aggregate turnover in all goods of a dealer at all places of business in the State. The court noted that the legislative power of the State under Entry 54 of the State List is subject to the limitations imposed by Entry 92-A of List I and Article 286 of the Constitution, which prohibits the State from taxing inter-State sales. The court emphasized that the Forty-Sixth Amendment to the Constitution, which allowed the State to tax the transfer of property in goods involved in the execution of works contracts, did not extend to transactions that are inter-State in nature. The court concluded that the State Legislature cannot impose tax on inter-State transactions, as per the constitutional limitations and the definitions provided in the Karnataka Sales Tax Act. Therefore, the assessee is entitled to exemption from tax on inter-State purchases of goods used in the execution of the works contract. Conclusion: The court allowed the appeal, setting aside the order of the Second Revisional Authority and confirming the order of the First Revisional Authority, which had dropped the proposal to levy tax under Section 5-B of the Act on inter-State purchases of goods used in the execution of the works contract. The court held that the turnover pertaining to inter-State purchases is not liable to tax under Section 5-B of the Karnataka Sales Tax Act, 1957, and the assessee is entitled to exemption.
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