2021 (10) TMI 1073 - HC - VAT and Sales Tax

Valuation - permissible deduction for the purpose of computing the respondent s taxable turnover or not - bank charges, guesthouse charges, fuel charges, computer expenses, and entertainment charges incurred by the respondent - expenses relatable to labour and other like charges or not - Rule 3 (2) (l) of the KVAT Rules? - HELD THAT - Insofar as deductions in the nature of interest charged by the client towards postage, telephone expenses, etc. incurred by the dealer and also vehicles used exclusively used by the contractor in the execution of the works contract are concerned, a co-ordinate Bench of this Court in the case of Larsen Toubro v. State of Karnataka 2009 (9) TMI 933 - KARNATAKA HIGH COURT while considering the provisions under the Karnataka Sales Tax Act, 1957 has held that the said charges undoubtedly come within the scope of the cost of the establishment of the contractor to the extent it is relatable to supply of labour and services. The issue was also examined with reference to the principles laid down in Gannon and Dunkerley 1992 (11) TMI 254 - SUPREME COURT wherein the Hon ble Apex Court has held that the value of goods involved in the execution of works contract has to be determined after taking into consideration the value of the entire works contract after deducting the charges toward labour and services. All the deductions claimed by the assessee are relatable towards establishment charges as aforesaid which deserves to be allowed as deductible expenditure for arriving at the value of the goods. Otherwise, there will be a possibility of levying tax on an amount over and above the actual value of the goods, which is impermissible under law - the Tribunal has rightly allowed the appeal setting aside the finding of the authorities. The revision petition stands dismissed.

Summary

Issues:
1. Interpretation of Rule 3 (2) of the Karnataka Value Added Tax Rules, 2005 regarding permissible deductions for computing taxable turnover.
2. Whether expenses like bank charges, guesthouse charges, fuel charges, computer expenses, and entertainment charges can be considered as establishment expenses under Rule 3 (2) (l) of the KVAT Rules.

Analysis:
1. The revision petition challenged the Karnataka Appellate Tribunal's order allowing deductions claimed by the respondent under the KVAT Act. The questions of law revolved around the Tribunal's decision on the nature of expenses like bank charges, guesthouse charges, fuel charges, computer expenses, and entertainment charges in relation to taxable turnover computation.
2. The Tribunal based its decision on precedents like Gannon Dunkerley and Co. v. State of Rajasthan and State of Jharkhand v. Voltas Limited, East Singhbhum. The respondent argued that the expenses were establishment charges, including administrative overheads, accommodation for staff, refreshments for laborers, and fuel expenses for transport.
3. The Revenue contended that the expenses did not fall under 'labour and other like charges' as per Rule 3 (2) (l) of the KVAT Rules. They argued that the Tribunal erred in treating these expenses as establishment expenses, emphasizing that the term 'labour and other like charges' had a specific scope.
4. The Court analyzed Rule 3 (2) (l) and Explanation II, which includes charges for machinery, tools, planning, consumables, and establishment costs related to labor supply. Referring to Larsen & Toubro v. State of Karnataka, the Court highlighted that such expenses were considered part of the establishment costs in previous judgments.
5. Citing Gannon Dunkerley and Voltas Limited cases, the Court emphasized that all charges relatable to works contracts, except for the value of goods sold, were deductible. The judgments outlined permissible deductions, including costs of consumables, establishment charges, and other similar expenses related to labor and services.
6. Ultimately, the Court upheld the Tribunal's decision, stating that the deductions claimed were establishment charges and should be allowed to arrive at the value of goods. Denying these deductions could lead to taxing amounts beyond the actual value of goods, which would be unlawful.
7. Consequently, the Court ruled in favor of the assessee, dismissing the revision petition and affirming the Tribunal's decision to allow the deductions claimed.

This detailed analysis of the judgment provides a comprehensive overview of the legal issues, arguments presented, relevant legal provisions, and the Court's reasoning leading to the final decision.