2015 (12) TMI 1247 - HC - VAT and Sales Tax

Valuation - Sales tax / Service Tax in J&K - inclusion of service tax in the gross turnover for the purpose of levy of Sales Tax / TDS - Request for quashing clarification No.1 of 2014 dated 14th January, 2014 issued by Commissioner, Commercial Taxes Department of Excise and Taxation, Jammu- respondent No.2 herein on the ground that the same offends the statutory and legal rights of petitioners in so far it provides for charging of service tax on the gross value of the contract items - quashment of the Notification No.1/2014 dated 14.01.2014 - Whether respondent No.2 was legally justified in holding that the service tax was leviable on the gross value of the contract irrespective of inclusiveness of the tax factor in the approved rate of a given item. Held that - A bare look at the provisions engrafted in Section 25-C of the Act of 1962 lays it bare that the Commissioner is empowered to determine issues and issue clarifications in regard to various issues including issues relating to nature of any transaction and whether any tax is payable in respect of any particular sale or purchase. That being so, commissioner cannot be said to be lacking jurisdiction in issuing the impugned clarification. The objection is, accordingly, overruled. Payment for execution of works in terms of agreements was released in favour of petitioner after deducting tax over the gross amount. It is contended on behalf of respondents that under provisions of the Act of 1962 and Rules framed thereunder, sales tax is leviable on the gross amount of the contract. The sales tax leviable on the services rendered by the contractor in the shape of works contract has to be deducted at source from the gross amount of the contract. Thus, sales tax is included in the gross amount of the contract. The levy of sales tax under the Act of 1962 is not subservient to the contract agreement inter se the parties. The Assessing Authorities are under a legal obligation to look into every aspect of taxable turnover of a dealer at the time of assessment. There is no ambiguity in it that the types of services enumerated in the provision are covered under the definition of goods. A transaction, whether involving transfer of property or not, shall be deemed to be a sale by the person making the same. Services provided in execution of works contract are goods and, thus, the services provided constitute sale of goods which is exigible to tax under the relevant tax schedule. It is, therefore, amply clear that it is the services provided in the shape of works contract together with the goods, skill, labour, and consumables etc. which constitute goods. The person who executes the works contract is deemed to sell these goods attracting the tax provision. - In case of the former, the entire sales consideration would be taxable under Sales Tax Act or VAT Act whereas in the later case, the part of consideration payable on account of labour and service element would be excluded from the total consideration received and sales tax or value added tax would be chargeable only on the balance amount. A Five Judge Bench of the Hon ble Apex Court, in M/s. Kone Elevator India Pvt. Ltd. Vs. State of Tamil Nadu and ors. 2014 (5) TMI 265 - SUPREME COURT dealt with the controversy whether manufacture, supply and installation of LIFTS is to be treated as sale or works contract . The majority view was that the decision rendered in State of AP Vs. Kone Elevators (India) Ltd. reported in 2005 (2) TMI 519 - SUPREME COURT OF INDIA did not correctly lay down the law. Contract for supply of goods and materials as well as installation amounts to works contract and the constitutional Bench Judgment of the Hon ble Apex Court upholds such view. However, the impugned clarification, though reiterating the same principle, departs from the issue as to whether service tax has to be charged on the gross amount of the contract or after deducting the tax element in contracts where the agreement is inclusive of taxes. It is, fallacious to hold that Rule 19 of the Rules of 1962 does not cover inclusion of tax in sale price. Such an interpretation would render Clause (d) of Rule 19 of the aforesaid Rules redundant which provides the formula for computation of tax included in the sale price. Relief granted to the petitioners - Decided in favor of assessee.

Issues Involved:
1. Competence of respondent No.2 to issue the impugned clarification.
2. Legality of levying service tax on the gross value of the contract irrespective of the inclusiveness of the tax factor in the approved rate of a given item.

Detailed Analysis:

Issue 1: Competence of Respondent No.2
A bare look at the provisions engrafted in Section 25-C of the Jammu and Kashmir General Sales Tax Act, 1962, reveals that the Commissioner is empowered to determine issues and issue clarifications regarding various issues, including the nature of any transaction and whether any tax is payable in respect of any particular sale or purchase. Therefore, the Commissioner cannot be said to lack jurisdiction in issuing the impugned clarification. The objection is overruled.

Issue 2: Legality of Levying Service Tax on Gross Value
It is not in controversy that the payment for execution of works in terms of agreements was released in favor of the petitioner after deducting tax over the gross amount. The respondents contend that under the provisions of the Act of 1962 and the Rules framed thereunder, sales tax is leviable on the gross amount of the contract. The sales tax on services rendered by the contractor in the shape of a works contract must be deducted at source from the gross amount of the contract. Thus, sales tax is included in the gross amount of the contract. The levy of sales tax under the Act of 1962 is not subservient to the contract agreement inter se the parties. The Assessing Authorities are under a legal obligation to look into every aspect of the taxable turnover of a dealer at the time of assessment.

To appreciate this argument, it would be appropriate to refer to the definition of goods under Section 2(h) of the Act of 1962, which includes services provided in the shape of works contract, whether divisible or indivisible, involving the transfer of property or not. The definition of goods makes it clear that services provided in the shape of works contract are covered under the definition of goods. Therefore, services provided in the shape of works contract together with goods, skill, labor, and consumables constitute goods. The person who executes the works contract is deemed to sell these goods, attracting the tax provision.

Rule 19 of the Rules of 1962 lays down the formula for determining taxable turnover where the dealer has not charged the tax on the sale of goods separately but included it in the sale price. The tax included therein must be determined based on the formula provided in Rule 19(d). For example, where the rate of tax inclusive of service tax (10.5%) plus labor welfare tax (1%) totaling 11.5% is applicable, and the aggregate sale price is taken as Rs. 100/-, the deduction of tax under the formula would be computed as follows:

\[ \text{Rate of tax} \times \text{Aggregate of sale price} / (100 + \text{Rate of tax}) \]

Thus, using the formula, the deduction of tax would be:

\[ 11.5 \times 100 / 111.5 = Rs. 10.31 \]

Therefore, the taxable turnover would be:

\[ Rs. 100 - Rs. 10.31 = Rs. 89.69 \]

In the case at hand, respondents determined service tax over the gross amount, i.e., Rs. 100/-, which comes to Rs. 11.50/- instead of determining it based on the above formula, which comes to Rs. 10.31/-. This results in charging an excess tax of Rs. 1.19/- over the aggregate value of the sale price of Rs. 100/-, representing the element of tax over tax, i.e., cascading.

Condition 15 of the contract agreement provides for the levy of service/sales tax on the gross payment to the contractor and is deemed to be included in the contract sum quoted by the tenderer. Given this condition, it is clear that the tax leviable on services rendered by the contractor through works contract is included in the sale price and has not been charged on the sale of goods separately. Therefore, the taxable turnover is to be determined in accordance with the formula in Clause (d) of Section 19 of the Act of 1962.

The contracts allotted to the petitioner were composite contracts for supply and installation, satisfying the fundamental characteristic of a works contract. The impugned clarification holding that inclusion of tax in the whole price of service provided is not covered under Rule 19 of the Rules of 1962 cannot be supported. The impugned clarification is fallacious as it departs from the issue of whether service tax must be charged on the gross amount of the contract or after deducting the tax element in contracts where the agreement is inclusive of taxes. Such an interpretation would render Clause (d) of Rule 19 redundant, which provides the formula for computation of tax included in the sale price. The impugned clarification cannot be sustained and has to be quashed.

Conclusion:
The Writ Petitions are allowed, and the following reliefs are granted:
1. Writ in the nature of Certiorari quashing the impugned clarification No.1 of 2014 dated 14.01.2014.
2. Writ in the nature of Mandamus commanding respondent No.8 to reimburse the excess tax deducted from the whole amount instead of the taxable amount.
3. Writ in the nature of Prohibition restraining respondent No.8 from further deducting the tax over the whole amount instead of the taxable amount of which the payment/outstanding is due.

This judgment is pronounced under Rule 138 (4) of the Jammu and Kashmir High Court Rules, 1999.

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