Facts

The respondents were executing civil contracts in the State of Karnataka. They purchased building materials like, sand, hardware as also declared goods like iron  & steel covered by section 15 of the CST Act either from within the State from registered dealers or from outside the state or from unregistered dealers. They approached the Authority for Advance Clarification and  Ruling (AAR)  by  wayof an application dated 31-01-2006 seeking rate of tax applicable on the goods involved in the works contracts executed by them. AAR ruled that in absence      of any specific entry providing rate of tax on works contract, the goods involved    in a works contract would attract rate of tax as per KVAT Act. It also held that declared goods covered by section 15 of the CST Act would attract tax at 4% if  used in the same form or at 12.5% in other cases. AAR  also observed that KVAT  Act was amended w.e.f. 01-04-2006 and clause (c) was inserted in section 4(1)       to provide a specific rate of tax on the goods involved in works contract as one category. Accordingly, Schedule VI was inserted to incorporate works contracts of various descriptions with corresponding rate of tax on each of them.

The department was of the opinion that the rate of tax applicable to “other goods” under section 4(1)(b) at  12.5% was  applicable to  works contracts prior   to 31-03-2006. According to them, the rate of tax cannot vary as per the goods involved in the execution of works contract. It is the conglomerate of goods used   in such works contract which is not allotted any specific rate of tax even prior      to 31-03-2006. Therefore, the residuary entry under section 4(1)(b) at 12.5% was applicable. The CCT (Bangalore) passed revision order treating the ruling of AAR as erroneous. Against the said order, appellants preferred an appeal before the Karnataka High Court which allowed it and observed that rate of tax as per the schedule entries would be applicable to individual categories of goods involved in the works contract. Against the said decision, department filed an appeal before Supreme Court.

Held

The Court held that it was possible for the Legislature to prescribe uniform rate     of tax on the goods involved in the works contract as a separate category which      it did w.e.f. 01-04-2006, in accordance with the mandate given by Supreme Court  in the case of GannonDunkerley & Co. v. State of Rajasthan (1 SCC 364). This

was sought to be done by inserting clause (c) in sec. 4(1). But prior to this date, there was no such uniform rate prescribed on works contracts and therefore, the rate applicable as per the schedules under the KVAT Act was to be levied on the goods. Sec. 4(1)(b) which prescribed the rate of tax at 12.5% on “other goods” only referred to those goods which were not specifically covered by any of the entries in rate schedules. It did not refer to the conglomerate of various goods involved in the works contract as one category. Therefore, prior to 31-03-2006,    the goods involved in the works contract would attract the rate of tax applicable   on the individual goods falling into any entry of the rate schedules appended to KVAT  Act subject to the declared goods liable to tax at 4% as per sec. 15 of the  CST Act, if used in the same form.

(CA No. 811 of 2018 (Arising SLP (C) No. 27048 of 2013 dt. 6-3-2018)

Editorial: The ratio of this decision lays down that transfer of property in goods involved in a works contract amounts to a deemed sale and exigibility to    tax is different from measure of taxation and rate of tax. Works contracts were always taxable prior to and after 01-04-2006 but rate of tax is different in two periods. Individual goods used in WORKS Contract, attract the rate of  tax asper their schedule entries if there is no specific rate of tax prescribed for entire conglomerate of goods involved in the works contract. The Legislature has the power but it needs to be exercised specifically.

Under GST law, works contract is defined under section 2(119) and refers to only immovable property. It is considered as “service” liable to tax @ 18% as per entry 6  of schedule II, without having any effect of the nature of goods that may   be involved therein. The problem of individual rates of goods or a composite rate does not arise.

“Abstract truth has no value unless it incarnates in human beings who represent it, by proving their readiness to die for it.”

– Mahatma Gandhi