Karnataka High Court
Sobha Developers Pvt Ltd vs The Additional Commissioner Of ... on 2 April, 2014
Bench: Dilip B.Bhosale, B.Manohar
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IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 2ND DAY OF APRIL 2014
PRESENT
THE HON'BLE MR.JUSTICE DILIP B.BHOSALE
AND
THE HON'BLE MR.JUSTICE B.MANOHAR
STA.NO.4/2011 C/W.STA.NO.3/2011
BETWEEN:
Sobha Developers Pvt. Ltd.,
No.E-106, Sunrise Chambers,
No.22, Ulsoor Road,
Bangalore - 560 042
Rep by its Senior Manager-Finance
Mr.M.Radhakrishnan. ...Common Appellant
(By Sri.K.P.Kumar, Senior Advocate for
Sri.T.Suryanarayana, Advocate for M/s.King &
Partridge for Appellant)
AND:
The Additional Commissioner
Of Commercial Taxes, Zone I,
Commercial Tax Department
Gandhi Nagar,
Bangalore - 560 009. .... Common Respondent
(By Sri.T.K.Vedamurthy, HCGP)
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These STA's are filed under Sec.24(1) of the KST
Act, against the revision order dated 27.11.2010 passed
in No.ZAC-1/BNG/SMR-96/2009-10, T.No.1040/2010-
11 on the file of the Additional Commissioner of
Commercial Taxes, Zone-II, Bangalore, remanding the
matter in levy of penalties and interest as applicable for
the assessment years in question and accordingly
concluding the revision proceedings.
These appeals coming on for hearing and having
Reserved for Judgment on 12-03-2014, this day,
B.Manohar.J., pronounced the following:
JUDGMENT
The assessee has filed these Sales Tax Appeals challenging the order dated 27-11-2010 passed by the Additional Commissioner of Commercial Taxes, Zone-I Bangalore in exercise of his revisional power under Section 22-A(1) of the Karnataka Sales Tax Act (for short 'the Act') setting aside the order dated 5-7-2008 passed by the Joint Commissioner of Commercial Taxes (Appeals) (hereinafter referred to as 'the First Appellate Authority') and the subsequent assessment order dated 8-9-2008 for the assessment years 2003-04 and 2004-05.
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2. The appellant is a Private Limited Company engaged in execution of civil works contracts such as construction of buildings and apartments, registered both under the Karnataka Sales Tax Act (for short 'the KST Act)and Central Sales Tax Act (for short 'the CST Act'). The appellant filed annual returns in Form No.4 as per the provisions of KST Act for the assessment years 2003-04 and 2004-05, declaring its total and taxable turnover under both KST and CST Acts and also claimed certain deductions as well as exemptions. The Assessing Authority, while assessing the returns found certain discrepancies with regard to certain deductions claimed. Accordingly issued notice in Form 31-A proposing to disallow certain deductions and exemptions claimed by the appellant. The appellant filed reply to the proposition notice and objected for the proposal set out by the Assessing Authority. The Assessing Authority after considering the objections raised by the appellant concluded the assessment vide 4 orders dated 6-3-2007 and 28-06-2007 for the assessment years 2003-04 and 2004-05 both under the KST and CST Acts.
3. The appellant being aggrieved by the assessment order passed by the Assessing Authority preferred an appeal before the First Appellate Authority contending that denial of deductions and exemptions of certain claims made by the appellant is contrary to law as per the provisions of KST and CST Acts. The appellant is entitled for deductions in respect of works contracts and labour charges. The First Appellate Authority after considering the matter by its two separate orders dated 5-7-2008 allowed the appeal in part insofar as certain claims made under KST Act and allowed the appeal in toto in respect of the claim made under the CST Act. On the basis of the order passed by the Appellate Authority, the Assessing Authority passed the reassessment order on 8-9-2008 under Section 12-A of 5 the KST Act, recomputing the appellant's claim. On scrutiny of the orders passed by the First Appellate Authority as well as the reassessment order passed by the Assessing Authority, the Additional Commissioner of Commercial Taxes found that the order passed by the First Appellate Authority as well as the reassessment order passed by the Assessing Authority are erroneous in law and also they are prejudicial to the interest of the Revenue. The Joint Commissioner of Commercial Taxes proposed to initiate the suo-motu proceedings and issued notice dated 20-03-2010 under Section 22-A (1) of the KST Act and also proposed to revise the order of the First Appellate Authority and also the reassessment order of the Assessing Authority.
4. In pursuance of the notice issued by the Revisional Authority, the appellant filed detailed written objections to the proposition notice and also contended that the order passed by the First Appellate Authority is 6 in accordance with law. Further contended that change of view is not a ground to invoke revisional power and sought for dropping of the proposition notice.
5. The Revisional Authority after considering the objections filed by the appellant, by its order dated 27-11-2010 reviewed the order passed by the First Appellate Authority as well as the revised assessment order and remanded some of the issues to the Assessing Authority for fresh examination. The appellant being aggrieved by the order passed by the Revisional Authority dated 27-11-2010 filed these two appeals only on two counts. Firstly, with regard to the disallowance of deduction of gross profit at the rate of 27.44% in addition to the standard deduction of 30% towards labour and like charges. Secondly, the disallowance of exemption claimed on export under Section 5(1) of the CST Act.
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6. The above appeals are admitted to consider the following questions of law.
1. Whether the Order in SMR.No.ZAC-
1/BNG/SMR-96/09-10 & T.No.1040/10-11 dated 27/11/2010 passed by the Respondent, in so far as it disallows the Appellant's claim of deduction of gross profits attributable to labour and like charges under Rule 6 (4) (n) of the Karnataka Sales Tax Rules read with Explanation II appended there to, is correct in law?
2. Whether the Order in SMR.No.ZAC-
1/BNG/SMR-96/09-10 & T.No.1040/10-11 dated 27/11/2010 passed by the Respondent, in so far as it disallows the exemption claimed by the Appellant under Section 5 (1) of the Central Sales Tax Act on the ground that photocopies of documentary evidence are not sufficient to claim such an exemption, is correct in law?
7. Sri.K.P.Kumar, learned Senior Counsel appearing for the appellant contended that the order passed by the Revisional Authority is contrary to law and erroneous in law. Section 5(b) of the KST Act is a charging Section which provides for levy of tax on transfer of property in goods involved in the execution of the works contracts, every dealer shall pay for each year, a tax on his taxable 8 turnover of transfer of property in goods in execution of the works contracts mentioned in column (2) of the Sixth Schedule at the rates specified in the corresponding entries in column (3) of the said Schedule. The above provision clearly states that the dealer is liable to pay tax only on taxable turnover of the dealer. To arrive at taxable turnover, Rule 6 (4) (n) of the KST Rules has to be followed. The taxable turnover has been defined under Section 2(u1) of the Act. The taxable turnover means the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total turnover as per the procedure prescribed under the KST Rules, but shall not include the turnover purchase or sale in the course of inter-State trade or commerce or in the course of export of goods. Under Rule 6 (4) (n) (v) of the KST Rules read with Explanation-II inserted from 1-4-1991 provides for gross profit earned by the dealer shall be apportionable to the value of the goods and labour and 9 other like charges involved in the execution of the works contracts in proportion to the ratio of their constitution in the total turnover. In other words, Explanation-II stipulates that the gross profit earned by the dealer shall be equally apportioned between the value of the goods transferred and the labour and like charges incurred. The appellant had executed various works contracts during the relevant assessment year. Since the appellant is not in a position to show the actual amount that they had incurred towards the labour and like charges, they have adopted standard deduction provided under Rule 6(4)(n)(v) of the KST Rules. The appellant had, therefore, claimed deduction of 30% of their contract receipts towards the labour and like charges. Further the appellant had apportioned the gross profit earned by it, between the value of goods transferred and the labour and like charges. In other words, the appellant had added the gross profit earned by it to the value of goods transferred and had 10 accordingly paid the tax on the same. In the same line, the appellant had also added proportionate amount of the gross profit to the 30% it had claimed towards the labour and like charges. In short, the appellant had claimed deduction of the proportionate amount of gross profit in addition to 30% towards labour and like charges. Hence, he claims that deduction of labour charges with gross profit even in case of standard rate/percentage is admissible. He also relied upon the judgment reported in (1993) 88 STC 204 (THE GANNON DUNKERLEY v/s STATE OF RAJASTHAN AND OTHERS). Insofar as the second question of law is concerned, learned counsel for the appellant did not press the same.
8. On the other hand, Sri.T.K.Vedamurthy, learned Government Pleader argued in support of the order passed by the Revisional Authority and contended that the Assessing Authority allowed gross profit at 27.44% 11 on labour charges apart from deduction at 30% under Rule 6(4)(n)(v) of the table of the KST Rules, which is impermissible. Explanation-II is not applicable to Rule 6(4)(n)(v) of the KST Rules as it allows deduction on labour charges at standard formula out of the total value of contract which includes gross profit. The Revisional Authority after considering the matter in detail, set aside the order passed by the Assessing Authority. The finding arrived at by the Revisional Authority is in accordance with law and sought for dismissal of the appeals.
9. We have carefully considered the arguments addressed by the learned counsel for the parties and perused the order impugned and other relevant records.
10. The assessee is a Private Limited Company engaged in the execution of civil works contracts such as construction of the buildings and apartments. In the annual returns filed by the assessee for the assessment 12 years 2003-04 and 2004-05, the assessee had claimed certain deductions and exemptions. The Assessing Authority while concluding the assessment had allowed deduction towards labour and like charges at 30% of the actual contract receipt relatable to civil works contracts executed by the appellant after deducting the amount paid to the registered sub-Contractors and also allowed deduction of gross profit at 27.44% on labour charges. The Revisional Authority found fault with the same and held that when the assessee availed deduction of 30% towards labour charges under Rule 6(4(n)(v) of the table of KST Rules, they are not entitled for deduction of 27.44% of gross profit on labour charges. At the outset, we have gone through the relevant provisions of the KST Act and Rules with regard to the labour charges in works contracts. The relevant provisions are extracted hereunder:
5-B.Levy of tax on transfer of property in goods (whether as goods or in some other 13 form) involved in the execution of works contracts. - Notwithstanding anything contained in sub-section (1) or (sub-section (3) or sub-section (3-C) of Section 5, but subject to sub-section (4), (5) or (6) 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.
Section 2(u-1) " Taxable turnover " means the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total turnover and in such manner as may be prescribed, but shall not include the turnover of purchase or sale in the course of inter-State trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India.
6. Determination of total and taxable turnover,- [(1) The total turnover of a dealer, for the purpose of the Act, shall be the aggregate of -
a. ........................
b. ........................
(c) the total amount paid or payable to the dealer as the consideration for transfer or property in goods (where as goods or in 14 some other form) involved in the execution of works contract; and includes any amount paid as advance to the dealer as a part of such consideration;
Rule 6 (4) [xxxxx] In determining the taxable turnover, the amount specified in clauses [(a) to (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 sub-rule (1).] 6(4)(n) in the case of works contracts specified in serial numbers 6, 13, 14, 15, 16, [18, 19, 20, 21, 22, 23, [24, 25, [28], [29,] 30, 31, 32, 33, 34, [x x x ] [37, 38, 39 and 41] of the Sixth Schedule;
[(i) all amounts received or receivable in respect of any goods other than the goods taxable under sub-section (1-A) or (1-B) of Section 5 which are purchased from registered dealers liable to pay tax under the Act.] [(i) all amounts received or receivable in respect of goods specified in second, third and fourth schedules which are purchased from registered dealers liable to pay tax under the Act]
(ii) [all amounts received or receivable in respect of goods] which are specifically exempted from tax under any of the provisions of the Act;
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(iii) all amounts paid to sub-contractors as the consideration for execution of works contract whether wholly or partly:
Provided that, no such deduction shall be allowed unless the dealer claiming deduction produces proof that the sub-contractor is a registered dealer liable to tax under the Act and that the turnover of such amounts is included in the monthly statement of return of turnover, as the case may be, filed by such sub-contractor,
(iv) such amounts towards 'labour charges and other like charges' not involving any transfer of property in goods actually incurred in connection with the execution of works contract, or
(v) such amounts calculated at the rate prescribed in column (3) of the Table below, if they are actually incurred towards 'labour charges' and other like charges and are not ascertainable from the books of accounts maintained and produced by a dealer before the Assessing Authority.
Provided that where the turnover of a dealer claiming deduction under clauses (m) and (n) in any year is not sufficient to cover the deduction, it shall be allowed to the extend of the turnover of the dealer in that year, and the balance shall be carried forward to the year following next and so on.] Explanation-I.- For the purpose of clauses
(m) and (n) of sub-rule (4), 'labour and other 16 like charges' include, charges for obtaining on hire or otherwise machinery and tools used for execution of Works Contract, charges for planning, designing and architects' fees, cost of consumables used in the execution of the Works Contract, cost of establishment to the extent relatable to supply of labour and services and other similar expenses relatable to supply of labour and services.
Explanation-II. - For the purpose of clauses (m) and (n) of sub-rule (4), gross profit earned by a dealer shall be apportionable to the value of the goods and labour and other like charges involved in the execution of works contract in proportion to ration of their constitution in the total turnover.
11. Sub-Section 5B is the charging provision. It provides that every dealer executing works contracts is liable to pay tax on the value of the goods transferred in execution of the works contracts at the rate specified in Sixth Schedule of the KST Act. Section 5B expressly states that a dealer is liable to pay tax on his taxable turnover of goods involved in the execution of works contracts. It would be imperative to arrive at the taxable turnover of a dealer before calculating the tax 17 that the dealer is liable to pay for execution of his works contracts. Section 2(u1) defines taxable turnover. The definition makes it clear that the taxable turnover of a dealer is that turnover which is determined after making such deduction from the total turnover as may be prescribed. The amount which are permitted to be deducted from the total turnover for the purpose of arriving at the taxable turnover are provided under the KST Rules. Rule 6 provides the mechanism for determination of taxable turnover of a dealer. As could be seen from Rule 6(1)(c), the total amount paid or payable to the dealer as the consideration for transfer of property in goods in the execution of works contracts, form part of the total turnover of a dealer. As per Rule 6(1)(c) the total consideration received by the dealer for executing the works contracts constitutes total turnover. Rule 6(4) enumerates the amount that are deductable for the purpose of arriving at taxable turnover of a dealer. Rule 6(4)(n) enumerates the 18 deduction that are applicable to the works contracts. Among others, 'labour and like charges' is specified as permissible deduction from the total turnover in case of civil works contractors. Rule 6(4)(n)(iv) allows for deductions of labour and like charges and it specifically states that only those amounts actually incurred towards labour and like charges would qualify for deduction. Therefore, the dealer claiming such a deduction would have to show through sufficient documentary evidence that the deductions claimed by the assessee have actually been incurred. Rule 6(4)(n)(v) states that in case, where a dealer is not able to show the actual amounts expended towards labour and like charges, a fixed percentage of total receipt would be allowable towards the same as specified in the table provided in the Rules. In case of civil works contracts like construction of the building, the percentage fixed is 30% under the Rules. Therefore, if a works contractor who executes the civil works is not 19 able to show the actual amounts expended towards labour and like charges, then 30% of the total turnover would be eligible to be deducted as per Rule 6(4)(n)(v) of the Rules. Further, Explanation-I appended to Rule 6 states that for the purpose of clauses (m) and (n) of sub- Rule 4, labour and other like charges includes charges for obtaining on hire or otherwise machinery and tools used for execution of works contracts, charges for planning, designing and architect fee, the cost of consumables used in execution of the works contracts, the cost of establishment to the extent relatable to supply of labour and their services and other similar expenses relatable to the supply of labour and services. Explanation-II appended to Rule 6(4)(n)(v) which came into force w.e.f. 1-4-1991 states that the gross profit earned by the dealer shall be apportionable to the value of goods and labour and other like charges involved in the execution of works contracts in proportion to the ratio of their constitution in the total turnover. In other 20 words, Explanation-II stipulates that the gross profit earned by the dealer shall be equally apportioned between the value of goods transferred and labour and other like charges incurred. As per the Explanation-II, the assessee is entitled for deduction of 27.44% of the gross profit on labour charges.
12. In the instant case, the appellant had executed various works contracts during the relevant assessment years. The assessee was not in a position to show the actual amount that he had incurred towards the labour and like charges and therefore, he has adopted standard rate of deduction provided under Rule 6(4)(n)(v) and claimed deduction of 30% on its contract receipt towards the labour and like charges. As per Explanation -II, the appellant had apportioned the gross profit earned by it between the value of goods transferred and labour and like charges. The Assessing Authority after considering the relevant provision of the 21 law allowed the deductions. However, the Revisional Authority without critically examining the matter held that when the assessee availed the deduction of 30% towards labour charges under Rule 6(4)(n)(v) they are not entitled for deduction of 27.44% of gross profit on labour charges.
13. Explanation-II appended to Rule 6 opens with the words "for the purpose of clauses (m) and (n) of sub- Section 4". Therefore, Explanation-II is undoubtedly applicable to Rule 6(4)(n). It is pertinent to note that Explanation-II does not refer to Rule 6(4)(n)(iv) only, but refers to Rule 6(4)(n) as a whole. The standard rate of deduction is prescribed under Rule 6(4)(n)(v) and thus there cannot be any doubt whatsoever that Explanation-II is applicable to the said sub-Rule as well. If the legislature is intended to restrict deduction only to the standard percentage prescribed and nothing more, it could very well have been mentioned only Rule 22 6(4)(n)(iv) in Explanation-II and kept the Rule 6(4)(n)(v) outside the purview of Explanation-II. In view of clear, express and unambiguous provisions of Rule 6 of KST Rules and in particular Explanation-II, the appellant is entitled for deduction towards the gross profit in addition to the standard deduction available towards the labour and like charges.
14. The Hon'ble Supreme Court in a (1993) 88 STC 204 (supra) held that the gross profit attributable towards labour and like charges are eligible to avail as deduction in addition to the deduction claimed towards labour and like charges. The relevant observations of the Supreme Court reads as under:
The Value of the goods involved in the execution of a works contract will, therefore, have to be determined by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services which would cover.23
(a) labour charges for execution of the works;
(b) amount paid to a sub-contractor for labour and services;
(c) charges for planning, designing and architect's fees;
(d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract;
(e) cost of consumables such as water, electricity, fuel, etc, used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract; and
(f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services;
(g) other similar expenses relatable to supply of labour and services;24
(h) profit earned by the contractor to the extent it is relatable to supply of labour and services.
The Hon'ble Supreme Court has clearly held that profit earned by the Contractor to the extent it is relatable to supply of labour and service as a permissible deduction for the purpose of arriving at the taxable turnover of the works contractor. Further it is held that, that profit attributable to labour and like charges are separate permissible deductions.
15. The Revisional Authority has not critically examined Explanation-II appended to Rule 6 which was inserted w.e.f 1-4-1991. Except observing that Explanation-II does not apply to Rule 6(4)(n)(v) of the KST Rules, no reason has been assigned. The Assessing Authority after considering the matter in detail has allowed deduction of gross profit at 27.44% in the labour charges. In fact, no appeal has been filed before 25 the First Appellate Authority challenging the allowance of gross profit on labour charges. The assessee had approached the First Appellate Authority on the ground of denial of some other deductions and exemptions. The Revisional Authority, while interfering with the order passed by the First Appellate Authority denied the deduction of 27.44% of gross profit on labour charges. Hence, the order passed by the Revisional Authority insofar as denial of the appellant's claim of deduction of gross profits attributable to labour and like charges under Rule 6(4)(n) of the KST Rules read with Explanation-II appended thereto is not sustainable in law. Accordingly, the first question is answered in favour of the appellant and against the Revenue. In view of the submission of the appellant, the second question is dismissed as not pressed.
16. Accordingly, we pass the following: 26
ORDER The appeals are allowed in part. The order dated 27-11-2010 in No.ZAC-1/BNG/SMR-96/2009-10, T.No.1040/2010-11 passed by the Additional Commissioner of Commercial Taxes is set aside insofar as denial of deduction of gross profit towards labour and like charges.
Sd/-
JUDGE Sd/-
JUDGE mpk/-*