M/S Craft Interiors (P) Ltd. vs The Joint Commissioner of Commercial Taxes (Intelligence), Bangalore

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)

JUDGMENT

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

expands the scope of charging section i.e. Section 5B under KST Digitally signed by VISHAL ANAND Date: 2019.07.02 16:23:12 IST Reason:

Act, 1957.

1

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

2 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

issued by the Assessing Officer on 8 th 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

3 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

Judge of the High Court vide its Order dated 7 th January, 2003

placing reliance on the judgment of E.C.I.E. Pvt. Ltd. Vs.

Additional Deputy Commissioner, Commercial Taxes(Kar.)

and Another 1999(114) STC 309 in which the High Court of

Karnataka has upheld the constitutional validity of the said

Rule. So far as the order of the Joint Commissioner of

Commercial Taxes (Intelligence) dated 6 th November, 2002 is

concerned, granted permission to the authority to take up the

provisional assessment in furtherance to the notices dated 8 th

November, 2002 and to pass an appropriate order after hearing

the parties in accordance with law. Against the Order of the

learned Single Judge dated 7th January, 2003, the unsuccessful

appellant preferred LPA which also came to be dismissed with

supportive reasons vide judgment impugned dated 16 th

September, 2006 which is a subject matter of challenge in appeal

before us.

4

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.

Government of Andhra Pradesh 1997(105) STC 227(AP) struck

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

been dismissed by this Court on 29 th October, 1998 and in the 5 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

stood finalised on 25th February, 2002. The notice for provisional

assessment was issued on 8th 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

6 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.

7

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

Pradesh(supra) is wholly misplaced. In 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

8 Media Communications(supra) failed to notice that this Court in

Telangana Steel Industries and Others(supra) has held that ‘if

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 Media Communications case(supra) merely on

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.

9

16. Before we proceed with the matter further, it will be

apposite to take note of the relevant provisions of the KST, 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)

10

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

11 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:­

12 “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 Pyare Lal Malhotra and Others (supra), it brings out two basic

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 Prare Lal Malhotra

and Others(supra) principle in para 25 as under:­

13 “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 Pyare Lal Malhotra and Others(supra) quoted

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

14 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

15 validity of Rule impugned hereunder is misconceived and without

substance.

27. The judgment in Media Communications(supra) of which

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

Telangana Steel Industries and Others case(supra) has been

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 Media Communications(supra) to

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

16 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.

17

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

proceedings initiated pursuant to notices dated 8 th 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

18