Dismissed

The State of Karnataka v. M/S S N Builders & Developers

Karnataka HC30 Sept 2021STRP/325/2017

Case brief

AI extract

What is this about?

The High Court of Karnataka dismissed a revision petition by the State assailing an Appellate Tribunal order. The court held that tax on inter-state purchases used in works contracts under the composition scheme is leviable only on the actual purchase value, not on the purchase value plus added gross profit.

What did the court decide?

The revision petition was dismissed in favour of the assessee and against the Revenue.

The State of Karnataka Vs M/S S N Builders & Developers — GST and Indirect Tax | Karnataka HC (2021)

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

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DATED THIS THE 30^TH DAY OF SEPTEMBER, 2021

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PRESENT

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THE HON’BLE MRS.JUSTICE S.SUJATHA

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AND

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THE HON’BLE MR. JUSTICE RAVI V. HOSMANI

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S.T.R.P.No.325/2017

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BETWEEN :

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THE STATE OF KARNATAKA REP BY THE SECRETARY FINANCE DEPARTMENT VIDHANA SOUDHA BENGALURU-560 001

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...PETITIONER

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(BY SRI JEEVAN J. NEERALGI, ADV.)

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AND :

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M/s S.N.BUILDERS & DEVELOPERS NO.3761, N.S.PALYA, MAIN ROAD 29^TH MAIN, BTM LAYOUT 2^ND STAGE NEXT TO BWSSB PUMP HOUSE OFFICE BENGALURU-76 …RESPONDENT

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(BY SRI M.THIRUMALESH, ADV.)

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THIS STRP IS FILED UNDER SECTION 65(1) OF KARNATAKA VALUE ADDED TAX ACT, 2003, FILED AGAINST THE JUDGMENT DATED 17.12.2015 PASSED IN STA No.2064/2014 C/W STA Nos.2065 TO 2073 OF 2014 & STA Nos.2074 TO 2085 OF 2014, ON THE FILE OF THE DISTRICT JUDGE, MEMBER & COMMERCIAL TAXES MEMBER, KARNATAKA APPELLATE TRIBUNAL, BANGALORE, ALLOWING THE 22 APPEALS FILED UNDER SECTION 63 OF KARNATAKA VALUE ADDED TAX ACT, 2003 FILED AGAINST THE ORDER

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DATED 19.09.2013 PASSED BY JCCT APPEALS, BANGALORE IN VAT A.P.NOS.285 AND 286/2012-13 VAT A.P.NOS.287 TO 295/2012-13, AND VAT A.P.NOS 296 TO 307/2012-13, PARTLY ALLOWING THE APPEALS FILED AGAINST THE ORDER DATED 28.04.2012 PASSED BY THE DEPUTY COMMISSIONER OF COMMERCIAL TAXES (AUDIT AND RECOVERY)-4, 8 DVO-4, BANGALORE FOR THE TAX PERIODS OF JUNE 2007 AND JANUARY 2008, AND ORDER DATED 30.04.2012 FOR THE TAX PERIODS JUNE 2008, JULY 2008 SEPTEMBER 2008 TO DECEMBER 2008 JANUARY 2009 TO MARCH 2009 AND FOR THE TAX PERIODS APRIL 2009 TO DECEMBER 2009, JANUARY 2010 TO MARCH 2010.

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THIS PETITION COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J ., MADE THE FOLLOWING:

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O R D E R

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This revision petition is filed by the State assailing the order dated 17.12.2015 passed by the Karnataka Appellate Tribunal, Bengaluru, in STA No.2064/2014 and connected matters for the tax periods June 2007 and January 2008, June 2008, July 2008, September 2008 to December 2008, January 2009 to March 2009, April 2009 to December 2009 and January 2010 to March 2010.

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The assessee is a partnership firm engaged in the business of execution of civil works in the name and style of M/s S.N. Builders and Developers. The

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assessee is registered under the provisions of the Karnataka Value Added Tax Act, 2003 (‘the Act’, for short). The case of the assessee was taken up for audit and re-assessment and was concluded under Section 39

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(1) of the Act, 2003 for the tax periods under consideration wherein the assessee was subjected to inter-state purchases to tax after adding 20% gross profit on the purchase value, amongst other additional levies.

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Being aggrieved, the assessee has preferred appeals, but being unsuccessful, on further appeal before the Tribunal, the orders passed by the authorities were reversed, allowing the appeals filed by the assessee, holding that the taxes were leviable on the purchases only and not adding gross profit, if and when such inter-state purchases were made and there is transfer of property in such goods in the execution of a works contract.

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Being aggrieved, the Revenue has preferred this revision petition. The revision petition was admitted to consider the following questions of law:

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(1) Whether, in the facts and circumstances of the case, the Karnataka Appellate Tribunal is right in setting aside the levy of interest and penalty under Sections 36((1) and 72(2) of the KVAT Act, respectively?

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(2) Whether, in the facts and circumstances of the case, the Karnataka Appellate Tribunal is right in passing the impugned order dated 17.12.2015 and setting aside the orders of the First Appellate Authority and the Assessing Authority, insofar as they levied tax under Section 4 of the KVAT Act on the purchase value of goods bought from outside the State after adding a gross profit of 20% on the same?

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Learned counsel for the Revenue argued that

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the assessee had opted to pay tax under the composition scheme for the tax periods in question. The

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assessee had also purchased goods outside the State of Karnataka and had used the same in the course of executing works contracts. No tax liability was discharged on the said inter-state purchases. During the audit proceedings, the same having been discovered, the assessing authority passed a re-assessment order inter alia subjecting the inter-state purchase of goods used in the execution of works contract after adding 20% gross profit on the purchase value.

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Drawing the attention of the Court to Section 15 (5) (a) of the Act, learned counsel for the Revenue submitted that the words “such value” as found in Section 15 (5) (a) of the Act would refer to the sale value of the goods purchased from outside the State and used in the execution of works contract. The Tribunal grossly erred in holding that the words “such value” found Section 15 (5) (a) of the Act would refer to the purchase value of goods purchased from outside the State.

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Learned counsel for the assessee submitted

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that the authorities have misled in wrongly interpreting S.15 (5) (a) of the Act by adding gross profit of 20% to the purchase value determining the tax liability on the inter-state purchases in terms of Section 15 (5) (a) of the Act, which is wholly untenable. The Tribunal having noticed the error committed by the authorities, has rightly reversed the finding of the assessing authority and first appellate authority which is in conformity with Section 15 (5) (a) of the Act. Thus, he seeks for confirmation of the same by answering the questions of law in favour of the assessee and against the Revenue.

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We have heard the rival submissions of the learned counsel appearing for the parties and perused the material placed on record.

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The crux of the controversy relates to the interpretation of Section 15 (5) (a) of the Act. Under the

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scheme of the Act, Section 3 is the charging Section; liability to tax and levies thereon is provided in Section 4 of the Act. Section 15 of the Act deals with composition of tax which is hassle-free method and may be elected by the dealer to pay tax in lieu of the net amount of tax payable by him under the Act, at such rate not exceeding 5% on his total turnover or on the total consideration for the works contracts executed.

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Sub-Section (5) of Section 15 was inserted by Act No.4 of 2006 with effect from 01.04.2006. Section 15 (5) (a) of the Act is extracted hereunder for ready reference:

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“ 15. Composition of tax:

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(5) Notwithstanding anything contained in sub-section (1)—

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(a) a dealer executing works contracts and who purchases or obtains goods from outside the State or from outside the territory of India shall be eligible to opt for composition under sub-section (1) and if

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the property in such goods (whether as goods or ion some other form) is transferred in any works contract executed by him, the dealer shall be liable to pay tax on the value of such goods at the rate specified in Section 4, and such value shall be deducted from the total consideration of the works contracts executed on which an amount as notified is payable under subsection (1) by way of composition in lieu of the tax payable under the Act.”

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Clause (e) was inserted by Act No.6 of 2007 with

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retrospective effect from 01.04.2006. The said provision reads thus:

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(e) a dealer executing works contracts and opting for composition of tax under subsection (1), shall be liable to pay tax, if any, under sub-section (2) of Section 3, in addition to tax by way of composition on the total consideration for the works contracts executed.”

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A harmonious reading of the aforesaid

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provisions would indicate that under Section 15 (1) of the Act, composition scheme would be opted by any dealer other than a dealer who purchases or obtains goods from outside the State or from outside the territory of India, subject to conditions and in such circumstances as may be prescribed. In other words, any dealer who had purchased or obtained goods from outside the State or from outside the territory of India was not entitled to opt for the composition scheme. It appears that in order to provide the benefit of the composition scheme for the dealer who executes the works contract and who purchases or obtains goods from outside the State or from outside the territory of India, eligibility was provided with a caveat that if the property in the goods purchased are obtained from outside the State or from outside the territory of India (whether as goods or some other form) and is transferred to any works contracts executed by him, he

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shall be liable to pay tax on the value of such goods at the rate specified in Section 4 of the Act, 2003 and “such value” shall be deducted from the total amount of the works contracts executed on which tax is payable under sub-section (1) by way of composition in lieu of the tax payable under the Act.

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In terms of the Section 15 (5) (a) of the Act, a dealer executing works contract has to purchase or obtain goods from outside the state or outside the territory of India. If the property in such goods (whether as goods or in some other form) gets transferred in any works contract executed by the dealer, tax is liable to be paid at the rate specified in Section 4 of the Act on the value of “ such goods.” Such value shall be deducted from the total consideration of the works contract executed.

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The fulcrum of dispute herein relates to the

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interpretation of “value of such goods.” The language employed by the Legislature in Section 15[5][a] is plain and unambiguous. The expression “value of such goods” relates to purchases made on which liability of tax would be payable under Section 4, notwithstanding the rate of tax under the composition scheme at 4% during

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the relevant period on the total consideration for the works contract executed. However, this “value of the goods” which is subjected to the levy of tax under Section 4 has to be deducted from the total consideration of the works contract executed.

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At this juncture, it is profitable to refer to the

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judgment of the Hon’ble Apex Court in the case of

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V.V.S.Sugars .v. Government of Andhra Pradesh and

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Others [1994 (47) KLJ 162] wherein apex Court has held thus:

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“ That a taxing statute must be interpreted as it reads, with no additions and with no subtractions on the grounds of legislative intendment or otherwise.:

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In the case of Commissioner of Income Tax,

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West Bengal-I, Calcutta .v. M/s Vegetables Products

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Limited [(1973) 88 ITR 192] , the Hon’ble Apex Court has held thus:

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“….. If the language is plain, the fact that the consequence of giving effect to it may lead to some absurd result is not a factor to be taken into account in interpreting a provision. It is for the Legislature to step in and remove the absurdity. On the other hand, it two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted.”

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In the present case, the assessing authority as

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well as the first appellate authority proceeded to construe Section 15 (5) (a) of the Act inasmuch as the “value of such goods” as the sale value of the transfer of property in goods in any works contract executed by the dealer to bring it within Section 4 of the Act. Thus, the

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dispute is in a narrow compass as to whether tax is leviable under Section 4, or under Section 15 (5) (a) of the Act with respect to the gross profit earned by the dealer in transferring the goods purchased inter-state or from outside the territory of India in the composition scheme. This can be explained by the following example:

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A dealer makes inter-state purchases of goods worth Rs.1,000/-. The said goods are transferred in the execution of the works contract. Total consideration of Rs.3,000/is received on the said execution of the works contract. Undoubtedly, liability of tax on Rs.1,000/- would be under Section 4 of the Act. In the said transfer of property in goods, the sale value would be purchase value plus gross profit [(Rs.1,000/- + ‘x’ ] (x= GP). There is no mechanism under the Act to determine this ‘x’ amount. Now, the question would be whether ‘x’ amount is exigible to levy of tax at 4% under the composition scheme, OR, at regular rate of tax under Section 4 of the Act.

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A bare reading of Section 15 (5) (a) of the Act

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would indicate that the composition tax liability is on the total consideration for the works contracts executed at 4%, if applied to the inter-state purchases or the goods purchased from outside the territory of India and transferred in the execution of the works contract, the Revenue would suffer tax on the said sale which would have been collected if the said incidence of sale had taken place locally within the State. To remove this anomaly, a level play mechanism has been adopted to levy tax on the inter-state purchases or the goods purchased from outside the territory of India at the regular rate of tax and to deduct the same from the total consideration of the works contract executed by the dealer to make the dealer eligible to opt for composition scheme, despite purchasing goods from outside the State or outside the territory of India. If the provision is analyzed keeping this aspect in mind, by any stretch of imagination, it cannot be held that the levy of tax under

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Section 4 would be on the sale value of the goods transferred in the works contract executed by the dealer.

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The entire approach of the Revenue is fallacious and runs contrary to the intendment of the Legislature. Viewed from any angle, we do not find any perversity or illegality in the order of the Tribunal impugned.

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