SC uphelds validity of rule 6(4)(m)(i) of Karnataka Sales Tax Rules read with Explanation III to Rule 6(4)
ABCAUS Case Law Citation:
ABCAUS 3044 (2019) (07) SC
Important Case Laws Cited/relied upon by the parties:
E.C.I.E. Pvt. Ltd. vs. Additional Deputy Commissioner, Commercial Taxes (Kar.) and Another 1999(114) STC 309
Media Communications Vs. Government of Andhra Pradesh 1997(105) STC 227(AP)
State of Tamil Nadu vs. Pyare Lal Malhotra and Others 1976(1) SCC 834
M/s. Achal Industries vs. State of Karnataka AIR 2019 SC 1653
The instant civil appeal was filed against the judgment of the Division Bench of the High Court of Karnataka which dismissed the writ petition and upheld the validity of Rule 6(4)(m)(i) of the Karnataka Sales Tax Rules, 1957 (KST Rules) read with Explanation III to Rule 6(4) of the said rules.
The question raised in the instant appeal was 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 expands the scope of charging section i.e. Section 5B under KST.
The appellant was 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.
The assessing Officer issued notices for provisional assessment 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 carrying out the interior decoration, the appellant had purchased timber in log forms, plaster of paris, plywood, glass sheets and the said purchases had 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.
The main thrust of submission of the appellant was 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 the appellant, the said Rule was overstepping the substantive provision being unconstitutional was liable to be struck down.
The Hon’ble Supreme Court took note of the relevant provisions of the KST, 1957 and KST Rules, 1957 and the Explanation III to Rule 6(4) of the KST Rules, which clarifies the expression “in the same form” used in Rule6(4) (m)(i).
The Hon’ble Supreme Court opined that from the bare perusal of the provision of the KST Act and KST Rules, 1957 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 Hon’ble Supreme Court opined that the justification given by the appellant in reference to impugned notices was a question of fact to be examined by the assessing authority who had served the notices.
The Hon’ble Supreme Court opined 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 it appeared to be in clear consonance with the charging provision and does not militate against Section 5B of KST Act, 1957.
The Hon’ble Supreme Court noted that in view of the legal principles laid down by the Court, there are two basic principles governing sales tax law:
- 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
- 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 had been made.
The Hon’ble Supreme Court pointed out that it is trite law that tax provisions granting exemptions/ concessions are required to be strictly construed as recently held by the Court.
The Hon’ble Supreme Court opined that there is no variance between Rules 6(4)(m)(i) read with Explanation III and Section 5B of the KST Act,1957 and what was contended by the appellant in assailing the validity of Rule impugned hereunder is misconceived and without substance.
The Hon’ble Supreme Court held that the appeal was without substance and accordingly dismissed it.