A three-judge bench of the Supreme Court has categorically held that the works contracts prior to 1st April 2006 cannot be taxed at rates prescribed after the amendment in the Karnataka Value Added Tax (KVAT) Act, 2006.
A bench comprising Chief Justice Deepak Misra, Justice Khanwilkar and Justice Dr. D Y Chandrachud noted that the Act in its original form did not provide a uniform rate of the tax prior to 1-4-2006 on goods involved in the execution of works contract. It was only with effect from 1-4-2006 that section 4(1)(c) levying the tax on works contract by specifying the uniform rate of tax under Sixth Schedule was inserted. Thus prior to 1-4-2006 tax had to be levied as per section 3(1), the bench quoted.
The respondent-assessee, in the instant case, is engaged in executing civil works contracts and is registered both under the KVAT Act and the Central Sales Tax Act. It purchases building materials like hardware, sand and bricks falling under the Third Schedule to the KVAT Act, declared goods under Section 15 of the CST Act and other non-scheduled goods from within and outside the State and from unregistered dealers. On 31 January 2006, it made an application before the Authority for Advance Clarification and Ruling (‘AAR’) for guidance on the rate of tax applicable for the execution of civil works contracts under the KVAT Act.
In our view, it would be far-fetched to accept that in enacting Section 4(1)(b), the legislature intended to prescribe a uniform rate of tax, prior to 1.4.2006, for goods incorporated in a works contract.
The scheme legislated upon in Section 4(1) envisaged specific rates of tax on goods falling within the Second, Third and Fourth Schedules. What Section 4(1)(b) provided was a residual entry under which a rate of 12.5% was provided ‘in respect of other goods’. The expression ‘in respect of other goods’ meant goods other than those falling in the Second, Third and Fourth Schedules. Declared goods specified in Section 14 of the Central Sales Tax Act, 1956 were comprehended in Serial No.20 of the Third Schedule to the KVAT Act 2003 and attracted a rate of 4%, which applied to goods in that Schedule. As a result of the deeming definition of the expression sale, a transfer of property in goods involved in the execution of a works contract become exigible to tax.”
The bench further pointed out that the amendment introducing Section 4(1)(c) took effect on 1 April 2006 is not clarificatory. “It was with effect from 1 April 2006 that the State legislature mandated a uniform rate of tax on goods involved in the execution of works contracts as provided in the Sixth Schedule. The position as it existed up to 31 March 2006 was altered with effect from 1 April 2006. We are, therefore, unable to accept the submission of the State that up to 31 March 2006, Section 4(1)(b) envisaged a uniform rate for the transfer of goods involved in the execution of a works contract.”
“We are unable to subscribe to the submission which has been urged on behalf the appellant that Section 4(1)(b), as it existed prior to 1.4.2006 was a catch-all entry providing for a uniform rate of tax on goods involved in the execution of a works contract. Such a construction does not emerge from the plain meaning of the words used and is in fact belied by the need which was felt by the legislature to impose a uniform rate of tax only with effect from 1 April 2006. Before concluding, we need to clarify that the genesis of the present dispute arises out of the proceedings which were initiated before AAR by the respondent seeking guidance on the applicable rate of tax on the law as it existed until 31.03.2006,” the bench added.
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