VAT – Works Contract – Goods Involved in Execution of Works Contract – Rate of Tax Applicable to The Goods Deemed to be Sold, section 4(1)(c)of The Karnataka Value Added Tax Act, 2003

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The appellant, a partnership firm, engaged in the business of civil works contract, purchased necessary building materials, hardware, etc., the goods falling under Schedule III, certain items of ‘declared goods’ falling u/s. 15 of the CST Act and other non-scheduled goods from within and outside the State as well as from unregistered dealers. The appellant made an application u/s. 60 of the KVAT Act before the Authority for Clarifications and Advance Rulings (ACAR for short) seeking for clarification in respect of: a) A pplicability of the rate of tax on execution of civil works contract under the Act; and b) Whether input tax credit can be availed out of output tax paid by the contractor. The ACAR, after examining the matter in detail, by its order dated 2-8-2006 came to the conclusion that there is no specific entry providing rate of tax on works contract under the KVAT Act, up to 31-3-2006 and therefore, tax should be levied as per the rate applicable on the value of each class of goods involved in the execution of works contract i.e. if the goods involved are taxable at the rate of 4%, then works contract rate would be at 4% and if the rate is 12.5%, the works contract rate would also be at 12.5%. With regard to the clarification of input tax credit is concerned, no finding was given. The appellant subsequently sought for rectification of the order dated 2-8-2006 before the ACAR. The ACAR further clarified on 7-12-2006 stating that iron and steel is one of the commodities specified u/s. 14 of the CST Act 1956, as goods of special importance and therefore, the iron and steel are to be subjected to works contract tax at 4%, when it was used in the same form and if they are used in manufacture or fabrication of product, it would no longer qualify as iron and steel and would have to be subjected to works contract tax at 12.5%.The Commissioner for Commercial Taxes after noticing the clarification order passed by the ACAR found that the order passed by the ACAR is erroneous and prejudice to the interest of the revenue and issued notice u/s. 64(2) of the Act on 25- 8-2010. The Commissioner for Commercial Taxes, after considering the objections filed by the appellant, by its order dated 12-10-2010 set aside the order passed by the ACAR in exercise of its suo-motu revisionary power and held that the goods used in the works contract cannot be treated on par with the normal sale of goods for the purpose of arriving at the rate for the period prior to 1-4- 2006. Further, the iron and steel or any other declared goods used for executing the works contract would be liable to be taxed as per the State Law. The appellant, being aggrieved by the order dated 12-10-2010 passed by the Commissioner of Commercial Taxes, filed appeal before the Karnataka High Court.

Held

Section 4(1)(c) was inserted by Act No.4 of 2006 w.e.f. 1-4-2006 thereby levying tax on the works contract by specifying the rate of tax under the Sixth Schedule. Prior to the amendment, the tax was being collected on the rate applicable to sale of each class of goods under Section 3(1) of the Act. Section 3(1) of the Act provides for levy of tax on sale of goods. Section 4 prescribes the rate of tax. Neither section 3 nor section 4 of the Act seeks or intend to levy or prescribe different rate of tax for the goods involved in the normal sale and for the goods involved in the deemed sale. Both normal sale as well as the deemed sale should be treated as one and the same with respect to levy of tax on sale of goods. Admittedly, prior to 1-4- 2006 insertion of clause (c) to section 4, the rate of tax was not prescribed in respect of transfer of the property in goods, (whether as goods or in any other form) involved in the execution of works contract. Hence, the tax has to be levied as per section 3(1) of the Act. The sale under the works contract is a deemed sale of transfer of the goods alone and it is not different from the normal sale. Hence, the tax has to be levied on the price of the goods and material used in the works contract as if there was a sale of goods and materials. The property in the goods used in the work contract will be deemed to have been passed over to the buyer as soon as the goods or material used are incorporated to the moveable property by principle of accretion to the moveable property. For the period prior to 1-4-2006, tax has to be levied as per section 3(1) of the Act and for the period subsequent to 1-4-2006, tax has to be levied as per section 4(1)(c) of the Act. Accordingly, the High Court allowed the appeal filed by the firm. The order passed by the Commissioner was set aside and the order passed by the ACAR was restored.