Karnataka High Court
Thyseenkrupp Elevator (India) Private ... vs Assistant on 24 April, 2018
Author: S.Sujatha
Bench: S.Sujatha
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 24TH DAY OF APRIL, 2018
BEFORE
THE HON'BLE MRS.JUSTICE S.SUJATHA
W.P. Nos.13607/2017 & 14081-14091/2017 (T-RES)
BETWEEN :
THYSEENKRUPP ELEVATOR
(INDIA) PRIVATE LTD.,
NO.18 (CITB 127), 11TH MAIN, 33RD CROSS,
4TH BLOCK, EAST JAYANAGAR
BANGALORE-560001
REP. BY PRAKASH MENON
GENERAL MANAGER. ...PETITIONER
(BY SRI K.P.KUMAR, SENIOR COUNSEL FOR
SRI PRASHANTH KUMAR D., ADV.)
AND :
1. ASSISTANT COMMISSIONER
OF COMMERCIAL TAXES,
(AUDIT)-1-3, DVO-1,
5TH FLOOR, VTK-1, GANDHINAGAR
BANGALORE-560009
2. COMMISSIONER OF COMMERCIAL TAXES
VANIJYA THERIGA KARYALAYA,
GANDHINAGAR
BANGALORE-560009 ...RESPONDENTS
(BY SRI T.K.VEDAMURTHY, AGA.)
THESE WRIT PETITIONS ARE FILED UNDER ARTICLES
226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO
QUASH REASSESSMENT ORDER DATED 28.02.2017 PASSED BY
RESPONDENT VIDE ANNEX-A AND ETC.
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THESE PETITIONS HAVING BEEN HEARD AND
RESERVED ON 03.04.2018, COMING ON FOR
PRONOUNCEMENT OF ORDER THIS DAY, S.SUJATHA J.,
PASSED THE FOLLOWING:
ORDER
Petitioner has challenged the reassessment order dated 28.02.2017 passed by the Respondent No.1 at Annexure-A to the writ petitions relating to tax period April 2010 to March 2011.
2. The petitioner is engaged in supply, erection and commissioning of lifts and elevators all over India. The petitioner is registered under the Karnataka Value Added Tax Act, 2003 ['KVAT Act', for short] and Central Sales Tax Act, 1956. The petitioner entered into several agreements for supply, erection and commissioning of lifts and elevators with several customers during the assessment period in question. The petitioner also provides free maintenance service for the elevators supplied and installed at the customer's premises for a period of twelve months. The agreement/contract has -3- been split into two components i.e., [a] supply of elevator and other spare parts [b] installation, testing and commissioning of elevators. Prescribed Authority concluded the re-assessment proceeding, rejecting the returns filed by the petitioner for the tax periods in question and levied tax along with consequential penalty and interest treating the transaction as works contract exigible to tax under the Karnataka Value Added Tax Act, 2003 ['KVAT Act', for short]. Aggrieved by the same, these petitions are filed.
3. Learned Senior counsel representing the learned Counsel for petitioner contended that the petitioner's central procurement division is located in Thane, Maharashtra, and caters to the requirements all over the country including Karnataka. Elevators components are imported from outside India or domestically and stored in central procurement division in Thane. Elevators are not standard items but are -4- manufactured entirely in accordance with the design and specifications of the customer. The components of elevators are tested and dispatched directly to the customer's place for installation and commissioning. Quotations may be given by the factory at Thane or the respective branch servicing the area in which the customer is located. The quote would contain separate sections - one stating the technical specifications, second stating the price schedule for design and supply of elevator only and the third stating the price for installation, testing and commissioning. Separate orders would be placed by the customer one being purchase order and another work order. While the purchase order would be placed on the factory at Thane, the work order would be placed on the branch which is to carry out the installation, testing and commissioning. The purchase order clearly states that the sale price mentioned therein is for design and supply of elevator only and payment terms are to be strictly construed as -5- per the material supplied and appropriate tax, namely, CST, shall be payable thereon. The purchase order also indicates that entry forms such as waybill, road permit etc., for transit through state check posts will be provided by the customer. Thereafter, the manufactured elevator after testing and dismantling would be dispatched directly by the factory to the customer's site. Tax invoice would be raised by the factory charging CST which is made over to the State of Maharashtra. The branch would thereafter send its personnel to the customer's site to install, test and commission the elevator and realize the charges therefor in terms of the work order which being pure labour/service is liable to service tax in its entirety. During the year in issue, the service tax rate was 10.3% which the petitioner's branch in Karnataka collected and remitted to the Union of India. The petitioner in the returns for the tax period 2010-11 reflected the turnover relating to inter-state sales and labour and service -6- charges for installation, commission and testing as exempted turnover which were duly accepted by the VAT assessment authorities under Section 38 of the Act. The Respondent No.1 thereafter initiated reassessment proceedings and concluded the same treating the contract as indivisible contract and levied tax on the estimated value of materials involved in the execution of works contract under the Act along with consequential penalty and interest.
4. Learned Senior counsel would contend that the matter is squarely covered by the Judgment of this court in the case of 'STATE OF KARNATAKA AND OTHERS v. ECE INDUSTRIES LTD' reported in [2006] 144 STC 605 wherein the issue involved was whether elevators manufactured by ECE Industries Limited at Ghaziabad, stock transferred to the branch at Bangalore, installed, tested and commissioned by the said branch at the customer's site gave rise to liability -7- under the KST Act, 1957, the Division Bench of this Hon'ble Court dealt with the same and held that the job amounted to a works contract and there was transfer of property in the elevators in executing such contract resulting in a sale of elevator, such sale took place in the course of inter-state trade and commerce and as such an inter-state sale was not liable to KST. Being an inter-state sale, it mattered very little as to in which State the transfer of property took place. The said issue has been accepted by the revenue and the same has been followed by the other courts as well as this court. Learned Senior counsel would contend that the petitioner company has acquired the said business of ECE Industries Limited and continued the business on the same business module except the stock transfer of elevators to the branches was replaced by direct interstate sales to customers. However, for the assessment year 2010-11, respondent No.1 took a totally different stand that the entire contract amounted -8- to a turnkey job i.e. indivisible works contract. Respondent No.1 concluded the reassessment rejecting the claim of the petitioner and levied tax on the inter- state sales which is beyond the jurisdiction of the Authorities and contrary to Article 286 of the Constitution of India read with Section 3(a) of the CST Act. It was further submitted that levy of tax under the local Sales Act is without authority of law and is hit by Article 265 of the Constitution of India. Such power to levy sales tax under list I of Seventh schedule to the constitution, exercised under the State sale tax Authority is duly contrast to the Central power to levy.
5. Learned AGA appearing for the respondents justifying the impugned order submitted that writ petition has to be rejected in limine as the petitioner has not exhausted the alternative, effective and efficacious remedy available under the statute. It was submitted that supply of elevators and other spare parts from -9- Thane, Maharashtra, on placing purchase orders are obtained at the local business premises of petitioner who is alone bestowed with the contract by the contractees in the State of Karnataka to carry out the design, supply, installation and commissioning of the elevators and lifts and the transfer of property in the goods takes place at the time of incorporation into the works contract to the contractee and not at the time of supply of the same by the stipulated condition in the agreement, petitioner has made an attempt to split the composite contract of turnkey project into one for supply of materials by its manufacturing unit situated at Thane, Maharashtra and another for carrying out the subsequent work of installation, testing and commissioning of the very same goods by the petitioner in the State of Karnataka only with the intention to evade the taxes payable. In the returns filed for the period 2010-11, the petitioner has not admitted the Inter-state purchase value of goods corresponding to
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the labour and service charges disclosed in the returns filed. The petitioner has wrongly claimed the transaction as Inter-state sales albeit the transactions are local works contract attracting tax under Section 4(1)(c) of the KVAT Act. In view of the same, the re- assessment order passed by respondent No.2 is within the framework of the provisions of the KVAT Act and the same cannot be held to be without jurisdiction. It was further submitted that Constitution Bench of the Hon'ble Apex Court in the case of 'M/s. KONE ELEVATOR INDIA PVT. LTD. V. STATE OF TAMIL NADU AND OTHERS' reported in [2014] 7 SCC 1 has ruled that the nature of the transactions in the installation and commissioning of lifts and elevators constitute works contract and not sales. Thus, learned counsel seeks for dismissal of the writ petitions.
6. Heard the learned Counsel appearing for the parties and perused the material on record.
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7. The questions that arise for consideration in this proceeding are, [a] Whether the reassessment order passed under Section 39[1] of the KVAT Act is without jurisdiction?
[b] Whether the movement of goods occasioned from Thane, Maharashtra for executing the works contract in the State of Karnataka would be construed as local sale exigible to levy of tax under the KVAT Act?
8. As regards the maintainability of the writ petition, it is now well settled that alternative remedy is no bar for entertaining the writ petition when the challenge is to the jurisdiction of the Authority passing the impugned order. Hence, relegating the petitioner to avail the alternative remedy available under the KVAT
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Act would not be justifiable. Accordingly, the matter is considered on the merits of the case.
9. Learned Senior Counsel referring to the Division Bench Judgment of this Court in ECE INDUSTRIES supra, emphasized, in as much as, the applicability of Section 3[a] of the Central Sales Tax Act, 1956, as well as the jurisdiction of the Authority to levy tax under Entry 54, List 2, VII Schedule to the Constitution of India vis-à-vis Article 286 of the Constitution of India. It was submitted that in identical circumstances relating to the company-assessee, whose business has been acquired by the petitioner-assessee, the Division Bench of this Court has categorically held that the transaction is inter state sale and not amenable to the provisions of the local sales tax Act. The said Judgment had been carefully analyzed to advert to the arguments advanced by the learned Counsel for the parties. It is in the context of company engaged in the
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business of manufacture, supply and installation of lifts and elevators having branches all over the country, movement of the goods from Ghaziabad, U.P., to Bangalore, this Court examined the levy of tax under the Karnataka Sales Tax Act, 1957. The undisputed facts therein were that the Assessee had its manufacturing unit of lifts and elevators at Ghaziabad, U.P.,. The company at Bangalore undertook designing, manufacture, erection and commissioning of lifts and elevators according to the requirements of individual customer. The registered office at Bangalore procured orders from customers in Karnataka towards supply, erection and commissioning of lifts and elevators, but the manufacturing of these lifts and elevators were undertaken at its factory in Ghaziabad, U.P. The designing and construction of lifts is as per the requirement of each specific customer. Lifts and elevators so manufactured are later stock transferred in parts and received by the regional office at the
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customers' premises. The final erection and commissioning of lifts and elevators took place in the premises of the customers in the State of Karnataka. The Assessing Authority had completed the assessment originally under Section 17[6] of the Karnataka Sales Tax Act, 1957 by accepting the returns filed by the Assessee. After receipt of the report from the Intelligence Wing of the Department, wherein it was reported that there existed a large quantity of turnover which was exigible to tax, but which had not been declared in the turnover of the assessee, the assessing authority has re- opened the completed assessments and reassessment orders were passed, rejecting the returns filed by the Assessee, which was carried in appeal before the Appellate Authority and the Tribunal. Thereafter, a statutory appeal was preferred before this Court. In such circumstances, placing reliance on the Judgment of the Hon'ble Apex Court in the case of 'BUILDERS' ASSOCIATION OF INDIA v. STATE OF
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KARNATAKA' reported in [1993] 88 STC 248 and in the case of 'GANNON DUNKERLEY & CO. v. STATE OF RAJASTHAN' reported in [1993] 88 STC 204, it was held that it can be safely concluded that the principles for determining when a sale takes place in the course of inter-State trade or commerce laid down in Section 3 of the CST Act, 1956 would apply equally to transfer of property in goods involved in the execution of works contract. Alternatively, it is a transaction to be of inter-State character, it is as to in which State the transfer of property in goods is effected. Merely because lifts and elevators are installed and functioned in the State of Karnataka, it cannot be said that it is a local sale exigible to levy of tax under the Karnataka Sales Tax Act, 1957.
10. Learned Additional Government Advocate made an endeavour to distinguish the said Judgment placing reliance on the Constitution Bench Judgment of
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the Hon'ble Apex Court in the case of KONE ELEVATOR supra. Adverting to the said submission, it is apt to refer to the said Judgment of the Hon'ble Apex Court. As per the majority opinion, it is held that [i] A contract for manufacture, supply and installation of lift is a works contract and not a contract for sale. [ii] It has to be understood in the conceptual context of the manufacture and installation of a lift in a building. The lift basically comprises components like lift car, motors, ropes, rails, etc. having their own identity even prior to installation. Without installation, the lift cannot be mechanically functional because it is a permanent fixture of the building having been so designed. Therefore, the installation of a lift in a building cannot be regarded as a transfer of a chattel or goods but a composite contract. [iii] It has been held that, there is a composite contract for the purchase and installation of the lift. The price quoted is a composite one for both. Various technical aspects go into the installation of the
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lift. There has to be a safety device. A lift is installed on certain norms and parameters keeping in view numerous factors. The installation requires considerable skill and experience. The labour and service element is obvious. The nature of the contracts clearly exposits that they are contracts for supply and installation of the lift where labour and service element is involved. Individually manufactured goods such as lift car, motors, ropes, rails, etc. are the components of the lift which are eventually installed at the site for the lift to operate in the building. In constitutional terms, it is transfer either in goods or some other form. In fact, after the goods are assembled and installed with skill and labour at the site, it becomes a permanent fixture of the building. If there are two contracts, namely, purchase of the components of the lift from a dealer, it would be a contract for sale and similarly, if separate contract is entered into for installation, that would be a contract for labour and service. But, once there is a composite
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contract for supply and installation, it has to be treated as a works contract, for it is not a sale of goods or chattel simpliciter. It is not chattel sold as chattel or, for that matter, a chattel being attached to another chattel. Therefore, it would not be appropriate to term it as a contract for sale on the bedrock that the components are brought to the site, i.e., building, and prepared for delivery. Also it cannot be termed as contract for sale based on the bedrock of incidental service for delivery. It would not be legally correct to make such a distinction in respect of lifts, for the contract itself profoundly speaks of obligation to supply goods and materials as well as installation of the lift which obviously conveys performance of labour and service. Hence, the fundamental characteristics of works contract are satisfied.
11. In the light of the said Judgment, it is clear that once there is a composite contract for supply and
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installation, it has to be treated as a works contract, it is not a sale of goods or chattel simpliciter. Once character of works contract are met in a contract entered into between the parties, any additional obligation incorporated in the contract would not change the nature of the contract. However, it is made clear that if there are two contracts, namely, purchase of the components of lifts from a dealer, it would be a contract for sale and similarly if a separate contract is entered into for installation, that would be contract for labour and service. Thus, the nature of contract is relevant to determine the transaction whether is a sale simpliciter or works contract. Keeping these legal principles in mind, the specimen of the contract executed between the petitioner and M/s. Mahendra Hotels placed on record is examined. In Section 1 of the said contract [offer letter], the relevant paragraphs read thus:
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"Sub: Supply, installation, testing and commissioning of 1 No. Pazssenger Elevator for your project at Mysore.
Validity:
Our offer, unless withdrawn earlier, is valid for your acceptance for a period of 30 days from the date of this offer.
When accepted, this contract will be valid for a period of 12 months from the date of acceptance of this offer.
We trust you will find our offer in line with your requirement. In case any further information or clarification is required, we shall be pleased to furnish the same."
12. Price Schedule, Sheet-I of Section III contemplates price schedule for design and supply of passenger elevators as per the technical specifications enclosed. Payment of terms and the notes thereof depicts price is for design, supply of elevators only. Central Sales Tax on supply of goods has been
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considered at 12.05% being the rate prevailing on the date of the quotation. Clause 5 provides that in view of the works contract coming under the purview of VAT/CST Act with effect from 13.05.2002 if the goods are moving in pursuance of the works contract agreement, then in the event of VAT/CST being charged on the invoice, there would be no liabilities for WCT TDS on the part of the contractee for such goods and hence the contractee should not deduct TDS on WCT.
13. Section IV Price Schedule - Sheet II reads thus:
Price Schedule for Installation, Testing and Commissioning of Passenger Elevators as per the technical specifications enclosed.
S Brief Rate per Service Gross Q Total Value
No. Specification Elevator Tax Contract t
@ for y
10.30% Installation
[Per Unit]
1 BP/1.00MPS/7S/7L/M 1,55,032/- 15,968/- 1,71,000/- 1 1,71,000/-
SCAR/ACO/SCS/IRS/
EL/FS
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14. Clause 3.1 of Section VI deals with general terms of conditions relevant to purchase and work order. It is stipulated that the purchaser shall place a purchase order for the supply of product[s] as per respective price schedule with the company along with all the specifications and requirements of the product[s] and the layout drawing of the building or the structure where the product[s] is to be installed. The drawings shall be duly certified by the Architect or Consultant as authorized person of the Purchaser. The Company may help in giving the specification of the product as per the requirement and feasibility. The Purchaser shall place a Work Order for installation, testing and commissioning of the product[s] as per respective price schedule.
'Company', is defined under Clause 2 of Section VI as under:
"Company means ThyssenKrupp Elevator [India} Pvt. Ltd., Functional Industrial Estate, Parparganj, Delhi - 110 092.".
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15. Accordingly, tax invoice has been raised by the manufacturing unit at Thane in respect of the sale of elevator and components. The goods are moved from Thane, Maharashtra to the purchaser directly. Consignment documents placed on record substantiates the same. It is only towards the work order, payments are made to the petitioner-assessee. In this background, whether the movement of the goods from Thane, Maharashtra to Bangalore would be construed as inter- State sale as contended by the learned Senior counsel for the petitioners has to be examined in terms of Section 3(a) of the CST Act. Section 3(a) of the CST Act reads thus:
"3. When is a sale or purchase of goods said to take place in the course of inter-State trade or commerce: A sale or purchase of goods shall be deemed to take place in the course of inter-State trade of commerce if the sale or purchase-
(a) occasions the movement of goods from one State to another or
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(b) is effected by a transfer of documents of title to the goods during their movement from one State to another."
16. The Hon'ble Apex Court in the case of Gannon Dunkerley's case (supra) while considering the issue whether in exercise of legislative power to impose tax on sale or purchase of goods under entry 54 of List II of Schedule VII to the Constitution of India read with article 366(29-A)(b) has held that State is not competent to impose tax on such a transfer of property in goods (whether as goods or in some other form) involved in the works contract which constitutes a sale in the course of inter-State trade or commerce or sale outside the State or a sale in the course of import or export. In view of amendment to the provisions of the CST Act by Act No.20 of 2002 with effect from 11.05.2002, the States are now empowered to levy tax on inter-State works contract. However in the present
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case, the purchase orders are placed by the contractees/purchasers with the manufacturing unit at Thane for the purchase of lifts and elevators. Further on documentary evidence viz., specimen copy of the purchase order, supporting transporter challans, delivery documents and the tax invoice all reflect that the goods are manufactured/procured from Maharashtra and movement of goods occasioned from Maharashtra to Karnataka pursuant to issue of purchase order. From the aforesaid, it is discernable that the supply of elevators/lifts and components in the manufacturing unit at Thane, Maharashtra falls within the ambit of Section 3(a) of the CST Act i.e., occasioning movement of goods from one State to another. If so, such inter-State sales are beyond the competence of the State VAT Authorities, or in other words against the spirit of Articles 265 and 286 of the Constitution of India.
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17. In 'English Electric Company of India Ltd. v. Deputy Commercial Tax Officer' [1976] 38 STC 475, the Apex Court has observed thus:
"When the movement of goods from one State to another is an incident of the contract of sale, it is a sale in the course of inter-State trade falling under Section 3(a) of the Central Sales Tax Act, 1956. It does not matter in which State the property in the goods passes. What is decisive is whether the sale is one, which occasions the movement of goods from one State to another. The inter-State movement must be the result of the covenant, express or implied, in the contract of sale or an incident of the contract. It is not necessary that the sale must precede the inter-State movement in order that the sale may be deemed to have occasioned such movement. It is also not necessary for a sale to be deemed to have taken place in the course of inter-State trade or commerce, that the covenant regarding inter-State movement must be specified in the contract itself. It will
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be enough if the movement is in pursuance of and incidental to the contract of sale."
18. In 'Union of India v. K.G. Khosla and Co. Ltd.' [1979] 43 STC 457, the Supreme Court has stated as under:
"(i) that if a contract of a sale contains a stipulation for the movement of the goods from one State to another, the sale would certainly be an inter-State sale. But for the purposes of Section 3(a) of the Act it is not necessary that the contract of sale must itself provide for and cause the movement of goods or that the movement of goods must be occasioned specifically in accordance with the terms of the contract of sale. A sale can be an inter-State sale, even if the contract of sale does not itself provide for the movement of goods from one State to another but such movement is the result of a covenant in the contract of sale or is an incident of that contract :
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The question as regards the nature of the sale, that is, whether it is an inter-State sale or an intra-State sale, does not depend upon the circumstance as to in which State the property in the goods passes. It may pass in either State and yet the sale can be an inter- State sale."
19. It may be true that the main contract of supplying, installation and commissioning of lifts/elevators might have been split into two, viz., purchase order and work order placed by the customer/purchaser to avoid taxes payable to the State of Karnataka and both these orders are intrinsically interlinked with each other but movement of goods from Thane, Maharashtra to Karnataka pursuant to contract executed between the parties cannot be disputed. Even assuming that the contract is indivisible, transfer of property in execution of such contract amounting to a deemed sale is an inter-State sale. Provisions of section 3[a] are applicable to such works contract as held in
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ECE INDUSTRIES case supra. If such sale had occasioned inter-State movement and if so, it cannot just be subjected to local tax. The mere circumstance the property in the goods gets transferred at the time of incorporation of the goods in the contract is irrelevant. It is the contention of the assessee that the transaction relating to the work order has been reflected in the reports filed by the assessee and the applicable service tax has been paid on the same. Though this aspect may be not relevant criteria to decide whether the contract executed by the petitioner is divisible or not but would certainly throw some light on the design of the contract. The case of the revenue that the works contract receipts received by the petitioner in relation to turnkey project undertaken is being brought to tax which is in purview of Section 4(1)(c) of the KVAT Act, 2003, cannot be countenanced as the divisibility of the contract would not empower the Authorities to subject the inter state transaction to tax under the State Tax Act on the
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ground that the petitioner has employed dubious methods to avoid payment of tax to the State. It is necessary for the petitioner to employ the skilled and experienced engineers to carry out the installation and commissioning of lifts and elevators, but the same would not prove deemed sale of goods in Karnataka. Hence, for the aforesaid reasons, the order impugned cannot be held to be sustainable. Both the questions are answered against the Revenue. Hence, the following:
ORDER i. Writ Petitions are allowed.
ii. The order impugned dated 28.02.2017 passed by the Respondent No.1 at Annexure-A is quashed as far as levying tax under the provisions of KVAT Act, 2003 on the transaction of the contract executed by the petitioner as aforesaid.
iii. No order as to costs.
Sd/-
JUDGE ln., AN/-