(Prayer: These petitions are filed U/s.65(1) of KVAT Act, against the judgment and Order dated 10.09.2009 passed in STA.1260-1271/2008 on the file of the Karnataka Appellate Tribunal, Bangalore, allowing the appeal filed under Sec.63 of KVAT Act.)
1. The assessee was entrusted with the electrical work. The assessee has to supply the electrical equipments and materials and execute the work by its labour. For the assessment year 2006-07, the assessee filed return in which the cost of the material used for incorporation in the contract is separately mentioned in the tax slab applicable at 4%. In respect of other rest of works and materials, rate of tax is shown as 22.5%. The A.O. found that the contract work is indivisible and that the rate of tax shall have to be levied as per Section 4(c) of the KVAT Act on that rate on all the materials.
2. The Appellate Authority confirmed the order of the A.O. and rejected the appeal of the assessee. The Tribunal set aside the order of the appellate authority and held that as per the terms of the contract, the price of the materials (cable wire) incorporated in the contract works, has been separately quoted, Hence, it becomes divisible deemed sale. Therefore, held that levy of uniform tax in respect of cable wire, is held to be bad in law.
3. The State aggrieved by said order, has filed this revision. The following questions of law would arise for consideration.
'Whether uniform levy of tax U/s.4(1)(c) does not attract in the instant case as it is divisible contract and that for cable wires supplied in works contract, attracts lesser duty at 4% and not uniform rate at 12.5% is bad in law?'
4. The Tribunal has relied upon the decision of the Supreme Court in the case of Gannon Dunkerley & Co, and others Vs. State of Rajasthan and others, reported in (1993) 88 STC 204 (SC) wherein it was held that
'It is possible that the parties might enter into distinct and separate contracts, one for the transfer of materials for money consideration, and the other for payment of remuneration for services and for work done. In such a case, there are really two agreements, though is a single instrument embodying them, and the power of the State to separate the agreement to sell, from the agreement to do work and render service, and to impose a tax thereon cannot be questioned and will stand untouched by the present judgment.'
In the instant case, the tribunal found that the rates of cable wire were specifically stated in the contract. Therefore deemed sale of cable wire as per contract would constitute divisible contract and the levy of uniform tax is not correct as per Sec.4(1)(c) of the KVAT Act.
5. In the latter decision, in the case of Gannon Dunkerley & Co. and Others, Vs. State of Rajasthan and others, reported in (1993) 88 STC 204 (SC) at page 237 has summarized the proposition of law which are as following:-
'The aforesaid discussion leads to the following conclusion:-
1. In exercise of its legislative power to impose tax on sale or purchase of goods under entry 54 of the State List read with article 366(29-A)(b), the State Legislature, while imposing a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract is not competent to impose a tax on such a transfer (deemed sale) which constitutes a sale in the course of inter-State trade or commerce or a sale outside the State or a sale in the course of import or export.
2. The provisions of sections 3, 4, 5 and sections 14 and 15 of the Central Sale Tax, 1956, are applicable to a transfer of property in goods involved in the execution of a works contract covered by article 36(29-A)(b).
3. While defining the expression 'sale' in the sales tax legislation it is open to the State Legislature to fix the situs of a deemed sale resulting from a transfer falling within the ambit of article 366(29-A)(b) but is not permissible for the State Legislature to define the expression 'sale' in a way as to bring within the ambit of taxing power a sale in the course of inter-State trade or commence, or a sale outside the State or a sale in the course of import and export.
4. The tax on transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract failing within the ambit of article 36(29-A) is leviable on the goods involved in the execution of a works contract and the value of the goods which are involved in the execution of works contract would constitute the measure for imposition of the tax.
5. In order to determine the value of the goods which are involved in the exaction of a works contract for the purpose of levying the tax referred to in article 366(29-A)(b), it is permissible to take the Value of the works contract as the basis and the Value of the goods involved in the execution of the works contract can be arrived at by deducting expenses incurred by the contractor for providing labour and other services from the Value of the works contract.
6. The charges for labour and services which are required to be deducted from the value of the works contract would cover (i) labour charges for execution of the works, (ii) amount paid to a sub-contractor for labour and services, (iii) charges for obtaining on hire or otherwise machinery and tools used for execution of the works contract, (iv) charges for planning, designing and architect’s fees, and (V) cost of consumables used in the execution of the works contract, (vi) cost of establishment of the contractor to the extent it is relatable to supply of labour and services, (vii) other similar expense relatable to supply of labour and services, and (vii) profit earned by the contract to the extent it is relatable to supply of labour and services.
7. To deal with cases where the contractor does not maintain proper amounts or the account books produced by him are not found worthy of credence by the assessing authority the Legislature may prescribe a formula for deduction of cost of labour and services on the basis of a percentage of the value of the works contract but while doing so it has to be ensured that the amount deductible under such formula does not differ appreciably from the expenses for labour and services that would incurred in normal circumstances in respect of that particular type of works contract. It would be permissible for the Legislature to prescribe varying scales for deduction on account of cost of labour and services for various types of works contract.
8. While fixing the rate of tax it is permissible to fix a uniform rate of tax for the various goods involved in the execution of a works contract which rate may be different from the rates of tax fixed in respect of sales or purchase of those goods as a separate article.'
6. The said decision makes it explicit that the State Legislature cannot make law exercising the power under entry 54 of the State List to levy tax on the goods in the contract works when such deemed sale/transfer constitute a sale in the course of inter-State trade or commerce or a sale outside the State or a sale in the course of import and export.
7. In para 8 of the conclusion, it is also held that it is permissible to fix the uniform rate of tax for various goods involved in the execution of the works contract which rate may be different from the rates of tax fixed in respect of sales or purchase of those goods as a separate article.
8. The Gannon Dunkerley’s case was decided prior to amendment to Article 366 of Constitution of India which came into effect from 46th Amendment in the year 1983.
9. Section 4(1)(c) of KVAT act was incorporated by amendment with effect from 01.04.2006 when the law specifically authorizes the State to levy uniform tax. It may not be within the competence of the taxing authorities to enter in
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to contract to negate the effect of Section 4(1)(c) of the KVAT Act. Section 4 is the charging section, which lays down different tax rates for the goods mentioned in Schedule II to IV. In the case of Gannon Dunkerley it is categorically held that the State can legislate the law to levy uniform tax. The argument that such levy if uniform tax would be discriminatory and would be in Variation with the tax imposed on the particular product if it is not deemed sale under the contract works, is untenable. When the legislature empowers the taxing authority to levy uniform tax by Section 4(1)(c), it is impermissible for the assessee to contend that some of the items supplied in the contract works constitute divisible contract and it should attract less tax is untenable. In that view, the question of law is answered in favour of the petitioner. Accordingly, the revision are allowed.