Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO(s) 8898 OF 2011
M/S CRAFT INTERIORS(P) LTD. ….Appellant(s)
VERSUS
THE JOINT COMMISSIONER OF
COMMERCIAL TAXES
(INTELLIGENCE) & ANR. ….Respondent(s)
J U D G M E N T
Rastogi, J.
1. The civil appeal arises out of the judgment of the Division
Bench of the High Court of Karnataka dismissing the writ
petition and upholding the validity of Rule 6(4)(m)(i) of the
Karnataka Sales Tax Rules, 1957(hereinafter referred to as “KST
Rules”) read with Explanation III to Rule 6(4) of the said rules.
2. The question which has been raised in the instant appeal is
whether the condition of ‘use in the same form in which such
goods are purchased’ under Rule 6(4)(m)(i) of the KST Rules
Signature Not Verified
Digitally signed by
VISHAL ANAND
Date: 2019.08.29
15:26:20 IST
Reason:
expands the scope of charging section i.e. Section 5B under KST
Act, 1957.
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3. The brief facts of the case relevant for the purpose are that
the appellant is a private limited company engaged in the
business of interior decoration and other types of work. The
appellant had purchased various goods from registered dealers
under the KST Act, 1957 and used them in the execution of
works contracts. The appellant claimed deduction from the total
turnover of such purchases in terms of Rule 6(4)(m)(i) of the KST
Rules, 1957 as per which all amounts received or receivable in
respect of goods purchased from registered dealers and used in
the execution of works contracts in the same form in which goods
are purchased, can be claimed as deduction from the total
turnover.
4. The assessing Officer issued notices for provisional
assessment for the years 199899, 19992000, 20002001, 2001
2002 and 20022003 to deny the deduction of the value of
timber, purchased from the local registered dealers claimed
under Rule 6(4)(m)(i) on the ground that the timber was not used
in the same form in which such goods were purchased, while
executing the works contract. It was further observed that for
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carrying out the interior decoration, the appellant purchased
timber in log forms, plaster of paris, plywood, glass sheets and
the said purchases have been manufactured to produce the
goods which are necessary for interior decoration. The Assessing
Officer further observed that as per Rule 6(4)(m)(i), the registered
dealer purchases deductible from the works contract receipts is
limited to transfer of the purchased goods in the same form. As
per Explanation III of the said Rule “in the same form” do not
include the registered dealer purchases which are either
consumed or manufactured of other goods which are used in the
execution of the works contract. Hence, there shall be no
deductions as claimed.
5. It has been informed to this Court that five notices were
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issued by the Assessing Officer on 8 November, 2002 for
different assessment years under Section 28(6)(iii) of the KST Act,
1957 and reply was submitted by the appellant but the matter
has not been proceeded thereafter any further because of
pendency of the litigation. Being aggrieved, the appellant
preferred writ petition, assailing the five show cause notices
served upon the appellant/assessee and also the constitutional
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validity of Rule 6(4)(m)(i) read with Explanation III to Rule 6(4) of
the said rules.
6. The writ petition came to be dismissed by the learned Single
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Judge of the High Court vide its Order dated 7 January, 2003
placing reliance on the judgment of
E.C.I.E. Pvt. Ltd. Vs.
Additional Deputy Commissioner, Commercial Taxes(Kar.)
1999(114) STC 309 in which the High Court of
and Another
Karnataka has upheld the constitutional validity of the said
Rule. So far as the order of the Joint Commissioner of
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Commercial Taxes (Intelligence) dated 6 November, 2002 is
concerned, granted permission to the authority to take up the
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provisional assessment in furtherance to the notices dated 8
November, 2002 and to pass an appropriate order after hearing
the parties in accordance with law. Against the Order of the
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learned Single Judge dated 7 January, 2003, the unsuccessful
appellant preferred LPA which also came to be dismissed with
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supportive reasons vide judgment impugned dated 16
September, 2006 which is a subject matter of challenge in appeal
before us.
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7. The main thrust of submission of the learned counsel for
the appellant, Mr. Charanya Lakshmikumaran, is that the
condition under Rule 6(4)(m)(i) of goods purchased be used “in
the same form” is beyond the charging section(Section 5B) of the
KST Act, 1957. The charging section does not restrict the form in
which the goods are to be transferred in a works contract.
However, the Rule restricts the deduction available on the form in
which the goods are used in the execution of works contract.
According to learned counsel, the Rule referred to is overstepping
the substantive provision being unconstitutional is liable to be
struck down.
8. Learned counsel further submits that the High Court of
Andhra Pradesh in the case of Media Communications Vs.
1997(105) STC 227(AP) struck
Government of Andhra Pradesh
down a pari materia provision (Section 5F of the A.P. General
Sales Tax Act, 1957) on the premises that the said levy is
contrary to the single point system of tax and cannot be
accepted. Appeal filed by the Government of Andhra Pradesh
against the said Order in SLP(C ) Nos. 68046849 of 1998 has
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been dismissed by this Court on 29 October, 1998 and in the
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light of the judgment of the High Court of Andhra Pradesh, Rule
6(4)(m)(i) read with Explanation III is not sustainable and
deserves to be quashed.
9. Learned counsel further submits that provisional
assessment under Section 28 of the KST Act cannot be invoked
unless there is an assessment pending either for finalisation or
assessment for escaped turnover under Section 12A for the
assessment years 19981999 and 19992000. The assessment
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stood finalised on 25 February, 2002. The notice for provisional
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assessment was issued on 8 November, 2002. In the given
circumstances, there was no occasion to invoke Section 28 when
notice should have been issued under Section 12A, if upon going
through the records and the books of accounts, the assessing
officers/intelligence officers felt that the deduction under Rule
6(4)(m)(i) has been wrongly allowed and hence the turnover of the
appellant has escaped assessment.
10. According to the learned counsel, in the present case, no
notice was issued under Section 12A for the assessment years
19981999 and 19992000 and further assessments under
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Section 12 had already been finalised. Thus, Section 28(6) of the
Act could not have been invoked since there was no pending
assessment which sought to be revised by way of the provisional
assessment. At least for the two assessment years, the very
action initiated by the respondent is not in conformity with the
mandate of law and deserves to be interfered with by this Court.
11. Per contra, Mr. Devadatt Kamat, learned AAG supporting
the judgment of the High Court submits that Section 5B of the
KST Act and Rule 6(4)(m)(i) of KST Rules operate in different
spheres. Section 5B is a charging provision for levy of sales tax,
whereas Rule 6(4)(m)(i) is a provision for deduction. Under
Section 5B, tax can be levied on transfer of property in goods
(whether as goods or “in some other form”), whereas Rule 6(4)(m)
(i) provides for a deduction in respect of goods which have already
suffered tax and which are used “in the same form”. Thus, Rule
6(4)(m)(i) is in conformity with the charging provision and does
not militate against charging Section 5B and submits that the
very contention advanced by the appellant is misconceived and
has been examined by the High Court in the impugned judgment
needs no further consideration by this Court.
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12. Learned counsel further submits that Explanation III
appended to Rule 6(4) clarifies the expression “in the same form”
used in Rule 6(4)(m)(i) and the same goods can be taxed only
once and the same goods cannot be made subject matter of
multiple incidence of tax. However, if the goods which have
suffered taxation undergoes transformation into a different
commodity altogether and is then used in the execution of a
works contract, the same being a different commercial
commodity, is indeed liable to be taxed and this being in the
domain of the legislative competence of the authority cannot be
held to be ultra vires as prayed for.
13. Learned counsel further submits that the judgment of
Media Communications Vs. Government of Andhra
(supra) is wholly misplaced. In
Pradesh Media
Communications (supra), the High Court relied on Telangana
Steel Industries and Others Vs. State of A.P. and Others
1994 Supp(2) SCC 259 and recorded a finding that the first and
second proviso to Section 5F of the A.P. General Sales Tax Act are
ultra vires of the main provision. The fact is the High Court in
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Media Communications (supra) failed to notice that this Court in
(supra) has held that ‘if
Telangana Steel Industries and Others
two goods at hand be different commodities”, the single point
taxing principle would not debar realisation of tax once again.’
This what has been observed would not be construed as finding
in affirmance in case(supra) merely on
Media Communications
dismissal of the special leave petition(s) preferred by the State of
Andhra Pradesh.
14. Learned counsel further submits that whether the
assessee/appellant was eligible under Rule 6(4)(m)(i) is a
question of fact which will have to be determined in pending
proceedings initiated pursuant to the impugned notices served
upon the appellant. Since the provisional assessment has not
been finalised due to the pendency of the instant proceedings,
the Department be given liberty to complete these proceedings
obviously in accordance with law.
15. We have heard learned counsel for the parties and with
their assistance perused the material available on record.
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16. Before we proceed with the matter further, it will be
apposite to take note of the relevant provisions of the KST Act,
1957 and KST Rules, 1957:
“5B. Levy of tax on transfer of property in goods
(whether as goods or in some other form) involved
in the execution of works contracts.
Notwithstanding anything contained in subsection (1)
or subsection (3) or subsection (3C) of section 5, but
subject to subsection (4), (5) or (6)] 2 of the said
section, every dealer shall pay for each year, a tax
under this Act on his taxable turnover of transfer of
property in goods (whether as goods or in some other
form) involved in the execution of works contract
mentioned in column (2) of the Sixth Schedule at the
rates specified in the corresponding entries in column
(3) of the said Schedule.”
(emphasis supplied)
“6(4). In determining the taxable turnover, the amount
specified in clauses (a) and (p) shall, subject to the
conditions specified therein, be deducted from the total
taxable turnover of a dealer as determined under
clauses (a) to (e) of subrule (1).
(m). in the case of works contract specified in
serial numbers 1,2,3,4,5,6,7,8,9,10,
11,12,17,26,27,35,36,40 and 42 of the Sixth
Schedules:
(i) All amounts received or receivable
in respect of goods other than the goods
taxable under subsection (1A) or (1B) of
section 5 which are purchased from
registered dealers liable to pay tax under
the Act and used in the execution of
works contract in the same form in
which such goods are purchased.”
(emphasis supplied)
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17. Explanation III to Rule 6(4) of the KST Rules, which clarifies
the expression “ in the same form” used in Rule6(4) (m)(i) reads as
under:
“Explanation III: For the purposes of subrule (4), the
expression “in the same form” used in subclause (i) of
clause (m) shall not include such goods which, after
being purchased, are either consumed or used in the
manufacture of other goods which in turn are used in
the execution of works contract.”
(emphasis added)
18. From the bare perusal of the provision of the KST Act and
KST Rules, 1957 indicated above, it clearly envisages that Section
5B of the KST Act is a charging provision which empowers the
State to levy tax on the transfer of property in goods involved in
works contract. At the same time Rule 6(4)(m)(i) read with
Explanation III to Rule 6(4) of the KST Rules clarifies that the
same goods can be taxed only once and cannot be made subject
matter of multiple incidence of tax and the goods which have
suffered taxation undergoes transformation into a different
commodity altogether and is then used in the execution of a
works contract, the same being a different commercial
commodity is liable to be taxed. The justification which has been
tendered by the appellant in reference to five notices impugned in
the instant proceedings for the assessment years 19981999 to
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20022003 is a question of fact to be examined by the assessing
authority who has served him the notices.
19. We are clear, in our view, that Section 5B of the KST Act
and Rule 6(4)(m)(i) of the KST Rules operate in different spheres.
Section 5B is a charging provision for levy of sales tax whereas
Rule 6(4)(m)(i) is a provision for deduction from tax. Under
Section 5B, tax can be levied on transfer of property in the goods
whether as goods or in some other form whereas Rule 6(4)(m)(i)
provides for a deduction in respect of the goods which have
already suffered tax and which are used in the same form. Thus,
in our view, it appears to be in clear consonance with the
charging provision and does not militate against Section 5B of
KST Act, 1957.
20. This Court in
State of Tamil Nadu Vs. Pyare Lal
Malhotra and Others 1976(1) SCC 834 has held that if the
separate commercial commodities emerge out of the goods
already taxed earlier, the new commercial commodity is liable to
sales tax provided there is a law to this effect. The relevant para
is as under:
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“ 10. As we all know, sales tax law is intended to tax
sales of different commercial commodities and not to
tax the production or manufacture of particular
substances out of which these commodities may have
been made. As soon as separate commercial
commodities emerge or come into existence, they
become separately taxable goods or entities for
purposes of sales tax. Where commercial goods,
without change of their identity as such goods, are
merely subjected to some processing or finishing or are
merely joined together, they may remain
commercially the goods which cannot be taxed
again, in a series of sales, so long as they retain
their identity as goods of a particular type.”
(Emphasis supplied)
21. Taking note of the exposition of legal principles laid down in
(supra), it brings out two basic
Pyare Lal Malhotra and Others
principles governing sales tax law:
i. Sales tax can be levied on the same goods only once so long as
they retain their identity of goods of a particular type, and
ii. If separate commercial commodities emerge out of the (goods
already taxed earlier), then the said new commercial commodity
is liable to sales tax.
This is what has been conferred in Rule 6(4)(m)(i) read with
Explanation III to Rule 6(4) of which a reference has been made.
22. In Vasantham Foundry Vs. Union of India and Others
1995(5) SCC 289, this Court reiterated the Pyare Lal Malhotra
(supra) principle in para 25 as under:
and Others
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“25. Therefore, in our view “cast iron casting” in its
basic or rough form must be held to be ‘cast iron’. But,
if thereafter any machining or polishing or any other
process is done to the rough cast iron casting to
produce things like pipes, manhole covers or bends,
these cannot be regarded as “cast iron casting” in its
primary or rough form but products made out of cast
iron castings. Such products cannot be regarded as
‘cast iron’ and cannot be treated as “declared goods”
under Section 14(iv) of the Central Sales Tax Act. This
view is not in conflict with the view taken in the case of
Bengal Iron Corpn. [1994 Supp (1) SCC 310: (1993) 90
STC 47], but it is in consonance with the decision in
that case.”
23. The same principle has been recently reiterated in B.
Narasamma Vs. Deputy Commissioner of Commercial Taxes,
Karnataka and Another 2016(15) SCC 167. In para 18 thereof,
the principle of (supra) quoted
Pyare Lal Malhotra and Others
hereinabove is considered. Rule 6(4)(m)(i) came up for
consideration in B. Narasamma (supra) where this Court after
noting the said Rule came to the conclusion in para 23 as
under:
“23. On facts in this case, it has been found that the
appellant is engaged in works contracts of fabrication
and creation of doors, window frames, grills, etc. in
which they claimed exemption for iron and steel goods
that went into the creation of these items, after which
the said doors, window frames, grills, etc. were fitted
into buildings and other structures. On facts,
therefore, we find that the High Court’s judgment
[State of Karnataka v. Anant Engg. Words, 2006 SCC
OnLine Kar 840] is correct and does not need to be
interfered with inasmuch as the iron and steel goods,
after being purchased, are used in the manufacture of
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other goods, namely, doors, window frames, grills, etc.
which in turn are used in the execution of works
contracts and are therefore not exempt from tax.”
24. What emerges from the scheme of the Act and Rules framed
thereunder is that Rule 6(4)(m)(i) purports to grant benefit to the
assessee by allowing deductions for the value of goods which
have already suffered taxation and which goods substantially
retain their original identity while being used in the execution of
a works contract. Explanation III to Rule 6(4) clarifies it further
by categorically providing that in case the goods are transformed
into a different commodity which then is used in the execution of
works contract, then the benefit of deduction cannot be availed.
25. It is trite law that tax provisions granting
exemptions/concessions are required to be strictly construed as
recently held by this Court in M/s. Achal Industries Vs. State
of Karnataka AIR 2019 SC 1653.
26. In our considered view, there is no variance between Rules
6(4)(m)(i) read with Explanation III and Section 5B of the KST Act,
1957 and what is contended by the appellant in assailing the
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validity of Rule impugned hereunder is misconceived and without
substance.
27. The judgment in (supra) of which
Media Communications
the learned counsel for the appellant has placed heavy reliance is
of no assistance for the reason that mere rejection of special leave
petitions by this Court at the motion stage would not be
considered to be an approval of the view expressed by the High
Court of Andhra Pradesh. That apart, para 7 of the judgment in
(supra) has been
Telangana Steel Industries and Others case
noticed by the High Court in Media Communications (supra) and
arrived to the conclusion that
Telangana Steel Industries and
Others (supra) lent support to the reasoning of the High Court.
28. Para 7 of the judgment of this Court in
Telangana Steel
Industries and Others (supra) in fact disseminate the reasoning
recorded by the High Court in (supra) to
Media Communications
invalidate the first and second proviso to Section 5B.
“7. The above shows complexity of the concept of a
different commercial product coming into existence
because of manufacturing process undertaken. It is
because of this that we do not propose to decide the
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controversy at hand, which is whether iron wires are
separate commercial goods from wire rods from which
they are produced, by trying to answer whether they
are one commercial commodity or separate.
The point
has however arisen for consideration because we
are concerned with a single point sales tax, which
would not allow taxing of the same commodity
again. It is also not in dispute that if the two goods
at hand be different commodities, the single point
taxing principle would not debar realisation of tax
once again from the sale of wires. Shri Tarkunde’s
whole emphasis is that goods in question cannot be
regarded as two different commercial commodities. Let
it be seen why this stand has been take by the learned
counsel on behalf of the appellants and whether the
same is sound?”
(emphasis supplied)
29. So far as the submissions made by the learned counsel for
the appellant on merits in reference to the five impugned notices
of provisional assessment served under Section 28(6) is
concerned, whether the assessee was eligible under Rule 6(4)(m)
(i) is a question of fact which has to be determined in the
assessment proceedings and since the provisional assessment
has not been finalised due to pendency of the instant
proceedings, it may not be advisable for this Court to dilate on
the subject issue of the notices served upon the appellant at this
stage and leave it open to the appellant to address before the
assessing authority in the pending appropriate assessment
proceedings, if so advised.
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30. Consequently, in our considered view, the appeal is without
substance and accordingly dismissed. It will be open for the
assessing authority to proceed with the impugned assessment
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proceedings initiated pursuant to notices dated 8 November,
2002 independently without being influenced/inhibited by the
observations made by us and conclude it, after affording
opportunity of hearing to the appellant, expeditiously in
accordance with law. No costs.
31. Pending application(s), if any, stand disposed of.
………………………….J.
(A.M. KHANWILKAR)
.………………………….J.
(AJAY RASTOGI)
NEW DELHI
July 02, 2019
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