[2015] 77 VST 509 (Kar) [IN THE KARNATAKA HIGH COURT] State of Karnataka V. Transglobal Power Limited KUMAR N. AND MANOHAR B. JJ. October 16,2014 HF Assessee, including dealer (Registered or Unregistered) VALUE ADDED TAX WORKS CONTRACT CONSTRUCTION OF POWER LINES AND ERECTION OF TRANSMISSION TOWERS COMPRISING OF TECHNICAL SPECIFICATIONS, SUPPLY OF MATERIALS, CIVIL PORTION AND ERECTION PORTION DIVISIBLE CONTRACT WITH DISTINCTION BETWEEN CONTRACTS OF SUPPLY AND ERECTION SUPPLY OF SCHEDULED GOODS TAXABLE AT FOUR PER CENT. AND UNSCHEDULED GOODS AT 12.5 PER CENT. CIVIL PORTION INVOLVING USE OF MATERIALS WITH LABOUR TAXABLE AS WORKS CONTRACT NO TAX LEVIABLE ON ERECTION WORK, A LABOUR CONTRACT ALL FOUR PORTIONS OF COMPOSITE DIVISIBLE CONTRACT GIVEN TO SAME CONTRACTOR BOUND TO PERFORM TOTAL CONTRACT IN ITS ENTIRETY KARNATAKA VALUE ADDED TAX ACT, 2003 (32 OF 2004), SCH. VI, ENTRY 23. WORKS CONTRACT SALE LEVY OF TAX ON COMPOSITE CONTRACT CANNOT BE ON BASIS OF WORKS CONTRACT IF CONTRACT DIVISIBLE. During the years 2005-06 to 2007-08, the assessee, a registered dealer under the Karnataka Value Added Tax Act, 2003, was engaged in the execution of the works awarded by K for construction of power lines and erection of transmission towers for certain specified distances in the State. The prescribed authority held that the contract executed by the assessee for K was a divisible contract, for supply of materials and equipments by sale transaction and for execution of civil works and erection by labour. He levied tax at four per cent. on certain goods and at 12.5 per cent. on some other goods and treated the civil portion as taxable works contract and the erection portion as not taxable. Some mistakes found in the reassessment orders, were also rectified. The revisional authority exercising his powers under section 63A of the Act treated the project as a turnkey project and held that from April 1, 2006, the composite works contract executed by the assessee fell under entry No. 23 of the Sixth Schedule. Therefore, he revised the order, and subjected the turnover of the contractor to tax at 12.5 per cent. On an appeal filed before the Appellate Tribunal the order passed by the revisional authority was set aside and the reassessment and the rectification orders passed by the prescribed authority were restored. On revision petitions: Held, dismissing the petitions, that the contract awarded by K to the assessee was in four parts: (a) technical specifications for laying of stations; (b) supply of materials; (c) civil portion of the contract; and (d) erection portion. As could be seen from the terms of the contract, the parties intended it to be a divisible contract. A clear distinction was made between supply and erection contract. The second contract was supply of materials wherein the description of the goods, quantity, unit price including taxes and duties, freight, insurance, etc., were clearly set out. For the same value the supply contract was awarded to the assessee. The turnover declared by the assessee was liable to tax at four per cent. in respect of scheduled goods and at 12.5 per cent. in respect of unscheduled goods, the ownership of the materials being always with K. The third portion of the contract was the civil portion where the assessee was expected to use the material and with the help of labour lay foundation for erecting towers. It was a case of works contracts. The last portion of the contract was erection of the towers. It was purely a labour contract. Insofar as the civil portion of the contract was concerned, tax was leviable treating it as a works contract. Insofar as erection work was
concerned, no tax was leviable because it was a labour contract. All the four contracts were given to the same assessee by K who wanted to ensure that the erection work which was purely a labour work was also treated as an integral part of this composite contract on the single source responsibility basis. The contractor was bound to perform the total contract in its entirety, non-performance of any portion of the contract being liable to be treated as a breach of the entire contract. Intention was very clear, i.e., to see that the contractor did not wriggle out of the situation and that the object of entering into the contract was not frustrated. Even if a contract was a composite contract, if it was a divisible contract, then the levy of tax could not be on the basis of works contract only. Thus the finding recorded by the Tribunal that it was a divisible contract was proper. Therefore the Tribunal was justified in setting aside the order of the revisional authority and restoring the order passed by the prescribed authority. [The court observed that the taxes collected pursuant to revisional order would be refunded in accordance with law within specified period.] STRP Nos. 525, STRP Nos. 727, STRP Nos. 728, STRP Nos. 729, STRP Nos. 730, STRP Nos. 731, STRP Nos. 732, STRP Nos. 733, STRP Nos. 734, STRP Nos. 735, STRP Nos. 736, STRP Nos. 737, STRP Nos. 738, STRP Nos. 739, STRP Nos. 740, STRP Nos. 741, STRP Nos. 742, STRP Nos. 743, STRP Nos. 744, STRP Nos. 745, STRP Nos. 746, STRP Nos. 747, STRP Nos. 748, STRP Nos. 749, STRP Nos. 750, STRP Nos. 751, STRP Nos. 752, STRP Nos. 753, STRP Nos. 754, STRP Nos. 755, STRP Nos. 756, STRP Nos. 757, STRP Nos. 758, STRP Nos. 759, STRP Nos. 760, STRP Nos. 761 of 2013 decided on October 16,2014 Smt S. Sujatha, Additional Government Advocate, for the petitioner. G. Rabhinathan for the respondent. Cases referred to : The order of the court was made by -------------------------------------------------- ORDER N. KUMAR J. The Revenue has preferred these petitions against the order passed by the Karnataka Appellate Tribunal, which held when the contract executed by the assessee for KPTCL, was a divisible contract, separately for supply of materials and equipments by sale transaction and thereafter for execution of civil works and erection by labour. The assessee is a registered dealer under the provisions of the Karnataka Value Added Tax Act, 2003 (for short, hereinafter referred to as "the Act"). During the years 2005-06 to 2007-08, the assessee was engaged in execu tion of the works awarded by M/s. Karnataka Power Transmission Corpo ration Limited (for short, hereinafter referred to as "KPTCL") for construc tion of power lines and erection of transmission towers for certain specified distances in the Districts of Hassan and Mysore. The prescribed authority classified the taxable turnovers and levied tax at four per cent. on certain items and subjected to levy of tax at 12.5 per cent on some goods. As there was some mistakes in the reassessment orders, the same were rectified by the order dated February 27, 2009 passed by the prescribed authority. The Joint Commissioner of Commercial Taxes (Admn.), VAT Division 1, Banga lore, the revisional authority, exercising his powers under section 63A of the Act reviewed the reassessment orders. It was held when the prescribed authority while concluding the reassessment has wrongly classified the tax
able turnover and subjected to tax at four per cent. which were incorpo rated in the execution of works contracts of composite nature. According to the revisional authority from April 1, 2006, the works contract executed by the assessee falls in the entry No. 23 of the Sixth Schedule to the Act and is liable to pay tax at 12.5 per cent. Therefore, he revised the order, modified the rectification order and subjected the works contractor turnover activity and levied tax at 12.5 per cent. Aggrieved by the said order, the assessee preferred an appeal before the Karnataka Appellate Tribunal. The Tribunal partly allowed the appeals; setting aside the common revisional order passed by the revisional authority and restored the reassessment orders and the rectification order passed by the prescribed authority subjecting to tax the works contract executed by the assessee at four per cent. Aggrieved by the said order, the State has preferred these petitions. The learned Additional Government Advocate appearing for the Revenue assailing the impugned order contended the terms of contract disclose the work entrusted to the assessee is by way of "turnkey project". The terms of agreement expressly provide that this is a composite contract and therefore the revisional authority was justified in levying tax treating the Page No: 511 transaction in question as a works contract under entry 23 of the Sixth Schedule and the Tribunal has erred in treating the case as of sale and levying tax at four per cent. under entry 96 of the Third Schedule and therefore she submits a case for interference is made out. Per contra, learned counsel for the assessee supported the impugned order. In the light of the aforesaid facts and rival contentions, the point that arises for our consideration in these revision petitions is: "Whether the contract executed by the assessee for M/s. KPTCL is a divisible contract or indivisible contract notwithstanding the fact, it is treated as a composite contract?" It is not in dispute that M/s. KPTCL., awarded the contract to the assessee for construction of power lines and erection of transmission towers. The said contract was in 4 parts: (a) Technical specifications for laying of stations; (b) Supply of materials; (c) Civil portion of the contract; and (d) Erection portion. In the contract for technical specifications for laying of stations, clauses 7.0 and 7.1 read as under: 7.0 Construction of the contract 7.1 Notwithstanding anything stated elsewhere in the bid docu ments, the contract to be entered into will be treated as a divisible supply and erection contract. The supply portion of the contract will
relate to the supply of equipment and materials and the erection por tion will relate to the handling at the site, storage, erection, construc tion, testing, commissioning, etc., as defined in the bid documents. As could be seen from the aforesaid terms of the contract, the parties intended to be a divisible contract. A clear distinction is made between supply and erection contract. The second contract is supply of materials. This contract was awarded pursuant to the separate bid offered by the assessee for supply of materials and equipments which were accepted by M/s. KPTCL. In the contract, the description of goods, quantity, unit price including taxes and duties, freight, insurance, etc., were clearly set out. For the same value the supply contract was awarded to the assessee. The turn over declared by the assessee is liable to tax at four per cent. in respect of scheduled goods. In respect of unscheduled goods, the tax levied at 12.5 per cent. on supply of the said materials, the title in the case is passed to M/s. KPTCL. Thereafter, in turn handed over the said materials to the Page No: 512 assessee for safe custody as the trustee for and on behalf of M/s. KPTCL. The ownership of the materials was always with M/s. KPTCL. The third portion of the contract is the civil portion of the contract, where the assessee was expected to use the material and with the help of labour lay foun dation for erecting towers. It was a case of works contracts. The last portion of the contract is erection of the towers. It is purely a labour contract. Therefore, the prescribed authority framed the assessment accepting the case of the assessee that the contract for supply of materials is a simple case of supply of materials, as such; tax was paid on the value of turnover both at four per cent. and 12.5 per cent. depending upon the nature of goods supplied. Insofar as the civil portion of the contract is concerned, tax was levied treating it as a works contract. Insofar as erection work is concerned, no tax was levied because it was a labour contract. It is this finding which was found fault with by the revisional authority on the ground that the said order is erroneous and prejudicial to the interest of the Revenue. The revisional authority relied upon para No. 3.5 of D. W. A. No. KPTCL/TZM/ TRL/DWA-103 dated January 6, 2005, which reads as under: "It is expressly agreed to by the contractor that notwithstanding the fact that the contract is termed as civil contract, for convenience of operation and for payment of sales tax on supply portion, the other contracts namely erection is also integral part of the composite contract on the single source responsibility basis and the contractor is bound to perform the total contract in its entirety and non-perform ance of any part or portion of the contract shall be deemed to be a breach of the entire contract." In other words, it was treated as a "turnkey project". Because of this clause, the revisional authority was of the view that it is a composite cont ract and therefore he treated this contract as a works contract and levied tax under entry 23 of the Sixth Schedule. The Tribunal has set aside the said order. A careful reading of the aforesaid para 3.5 makes it clear for convenience of operation and for payment of sales tax on supply portion, it is treated as a contract for supply. Therefore, the intention of the parties is a manifest coupled with the said clause. The other terms and the conduct of the parties disclose in terms of the bid, the assessee supplied the materials as
per specifications and paid tax thereon and transferred title in the goods to M/s. KPTCL. Thus, KPTCL became the owner of the said materials. They in turn, handed over the materials for safe custody to the assessee to enable him to perform the said contract, i.e., erection work. As the KPTCL had entered into four contracts, unless these four contracts are performed in Page No: 513 unison, the object of given contract would have been frustrated. All the four contracts are given to the same assessee. Therefore, they wanted to ensure that the erection work which is purely a labour work was also to be treated as an integral part of this composite contract on the single source responsibility basis and the contractor was bound to perform the total contract in its entirety and non-performance of any portion of the contract was to be treated as a breach of the entire contract. Intention is very clear. In order to see that the contractor does not wriggle out of the situation and the object of entering into the contract is not frustrated. The KPTCL., was insisting that it is a composite contract to be performed by the assessee in its entirety. Therefore, it is not a case where a contract which is entered into is not divisible as contract for supply of material and contract for labour. Even if it is a composite contract, if it is a divisible contract, then the levy of tax cannot be on the basis of works contract only. In cases of com posite contract, which are not divisible, such contract should be treated as works contract and levy should be under Schedule VI of entry 23. In the instant case, as rightly pointed by the Tribunal, there are four contracts in nature. Each one of them is separate. In respect of the contract for sale of material taxes have been paid in accordance with law. No tax is payable in respect of contract for supply of labour. In civil works, it is a works contract and tax is levied under Schedule VI, entry 23. In those circumstances, we find that the finding recorded by the Tribunal that it is a divisible contract and the order passed by the revisional authority was erroneous is proper. The Tribunal was justified in setting aside the order of revisional authority and restoring the order passed by the prescribed authority. Therefore, the substantial question of law is answered in favour of the assessee. We do not see any merit in these revision petitions. Accordingly, petitions are dis missed. The taxes collected by the authorities in pursuance of the revisional order shall be refunded to the assessee as the said order is already been set aside by the Tribunal, which is confirmed by this order. The taxes collected shall be refunded in accordance with law within two months from today, in default of it, additional interest shall be paid at the rate of six per cent. per annum. In view of dismissal of the main petitions itself, IA-1/2013 for stay does not survives for consideration, the same is rejected. Page No: 514