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Judgment
N. Kumar, J.—All these three revision petitions are taken up for consideration together as the assessee is the same and the questions of law, which arises for consideration in all the three revision petitions are the same and therefore, they are disposed of by this common order. The petitioner is a company incorporated under the Companies Act, 1956 which is engaged in the execution of civil works contracts. It is one of the divisions of Larsen and Toubro Group Companies, it is registered under the Karnataka Sales Tax Act, 1957, under the Central Sales Tax Act, 1956 and under the Karnataka Tax on Entry of Goods Act, 1979. There are several units of the petitioner deployed in various locations in the State Government engaged in execution of civil works contracts. From the years 1988-1989 upto 2000-2001, a separate unit of the assessee was deployed in Kaiga, North Kannada District for construction of project for M/s. Nuclear Power Corporation Limited, a Government of India undertaking. As per the then existing provisions of Section 12E of Karnataka Sales Tax Act, 1957, a separate registration was obtained for the unit deployed at Kaiga and tax compliance was being furnished to the Deputy Commissioner of Commercial Taxes (Assessments), Dharwad. The petitioner has filed returns in respect of the execution of the works contract. Apart from other deductions claimed, the petitioner claims (i) disallowance of deduction claimed on expenses relating to own machinery and equipments deployed in the execution of works contract for construction of the project for the Nuclear Power Corporation Limited at Kaiga, from the total turnover under Rule 6(4)(n)(iv) read with Explanation I of the Karnataka Sales Tax Rules, 1957; (ii) disallowance of claim to deduction of establishment expenditure of the Head Office at Chennai and the Regional Office at Mumbai relatable to supply of labour and services in connection with the execution of the aforesaid contract under Rule 6(4)(n)(iv) read with Explanation I of Karnataka Sales Tax Rules, 1957; (iii) for the assessment year 1998-1999 disallowance of deduction claimed on labour charges and other like charges which were not allowed in the previous year 1997-1998 for insufficiency of total turnover and which are authorised by proviso to Rule 6(4)(n) of Karnataka Sales Tax Rules, 1957 to be carried forward and availed in the next and subsequent years. The Assessing Authority, the First Appellate Authority and the Tribunal have rejected these claims. Therefore, the assessee is before this Court challenging the aforesaid orders.
The learned Counsel appearing for the assessee, assailing the impugned orders contend that they have employed own machinery and equipments in the execution of works contract. When under the aforesaid provisions labour and other like charges include charges for obtaining on hire, machinery and tools used for execution of contract when the assessee employs his own machinery and equipments, the assessee is also entitled to proportionate or corresponding charges like hire charges. The same fall within the word "otherwise" used in Explanation I and the interpretation placed by the authorities, is contrary to the statutory provisions and therefore, requires to be set aside, lie further contended that as per the explanation to the aforesaid provision, labour and other like charges include charges for obtaining on hire or otherwise planning, designing and architect''s fees which the assessee had claimed under the heading of establishment, expenditure from the Head Office, Chennai and Regional Office, Mumbai, which also has been wrongly rejected. Though he claimed 3% of the total extent, atleast, he should be allowed deduction on the basis of the actuals and therefore, the order passed by the authority requires interference. Lastly, he contended that the second proviso to clause (n) expressly provides that where the turnover of a dealer claiming deduction under clauses (m) and (n) in any years is not sufficient to cover the deduction is to be allowed to the extent of the turnover of the dealer in that year and the balance shall be carried forward to the year following the next. The authorities have rejected the said claim on the ground that the assessee did not make any such claim at all and that there is no direction in the assessment order passed in the year 1997-1998 for carrying forward the said expenditure, which is ex facie incorrect and therefore, he submits that for the aforesaid reasons, the order requires to be interfered with.
Per contra, the learned Government Advocate supporting the impugned order contended that the word ''otherwise'' after the word hire'' has to be understood in the context of the rule of ejusdem generis as rightly held by the Tribunal and if so interpreted, the assessee is not entitled to any deduction in respect of the machinery and equipment employed by them as owners. Though under Explanation I, the assessee is entitled to charges for planning, designing and architect''s fees, assessee has not put forth any claim. Assessee is claiming a percentage of the total extent incurred in the Head Office and Regional Office, which is not permissible in law. Rightly, the authorities have rejected the said deduction. Lastly, it was contended that though the excess labour charges can be carried over to the next year, the condition precedent for such course is, first there should be a claim by the assessee and the Assessing Authority should pass a specific order for carrying over the excess amount, which in this case is missing and therefore, she submits no case for interference is made out.
In the light of the aforesaid facts and the rival contentions, the points that arise for our consideration are as under:
Whether the assessee is entitled to claim deduction of the expenditure incurred by him for deployment of own machineries and equipments in execution of the works contract under Explanation I, clause (n), sub-rule (4) of Rule 6 of the KST Rules, 1957?
Whether the assessee is entitled to disallowance of the expenditure in respect of the planning, designing and Architect''s fee, in other words establishment charges as provided in Explanation I on any percentage basis or on actuals based on the expenditure incurred in the Head Office or Regional Office?
What are the conditions to be fulfilled by an assessee to claim deduction under clauses (m) and (n) in any year and the excess labour charges to be carried over to the following year?
Point No. 1
Rule 6 of the KST Rules deals with determination of total and taxable turnover. Sub-rule (4) of Rule 6 provides that 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). Clause (n) of sub-rule (4) reads as under:
(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, 37, 38, 39 and 41 of the Sixth Schedule.-
(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;
(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-con tractor,
(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 extent of the turnover of the dealer in that year, and the balance shall be carried forward to the year following next and so on.
From the aforesaid provision, it is clear that for the purpose of clauses (m) and (n) of sub-rule (4) labour and other like charges include charges for obtaining on hire or otherwise machinery and tools used for execution of works contract. The argument is the word ''otherwise'' should be interpreted to include only charges in the nature of hire and nothing else. When an assessee purchases machinery and uses the same for execution of works contract, he is not entitled to any deduction towards labour charges as he has not paid any amount by way of hire charges and therefore, the assessee is not entitled to deduction of any amount under the said head. The Tribunal, upholding the order of the authorities has held that the aforesaid provision clearly says down that the deduction of labour and like charges, which includes charges for obtaining of machinery on hire charges actually incurred shall be deducted. As such the emphasis is on the expression ''actually incurred'' which means the amount of money actually spent. Dealing with the reliance on the words ''or otherwise'' occurring after the word ''hire'' in Explanation T to Rule 6(4)(n)(i), it was held the claim is based on the assumption that the words ''or otherwise'' are comprehensive enough to cover any notional amount. Rejecting the said contention as misconceived, it was held the explanation should be read along with the provisions of Rule 6(4)(n)(iv) and not in isolation. When so read, there is no ambiguity that it is only such expenditure actually incurred as hire charges alone qualifies for deduction and not any notional amount as claimed. Besides following the rule of ejusdem generis the words ''or otherwise'' used in Explanation I to Rule 6(4)(n)(iv) shall get its colour from the preceding word ''hire'' and therefore, it is only in the nature of ''hire'' such as taking the machinery on "lease'' and paying lease rental.
This is a case of wrong application of the principle of rule of ejusdem generis. When particular words pertaining to a class, category or genus are followed by general words, the general words are construed as limited to things of the same kind as those specified. This rule which is known as the rule of ejusdem generis reflects an attempt to reconcile incompatibility between the specific and general words in view of the other rules of interpretation that all words in a statute are given effect if possible, that a statute is to be construed as a whole and that no words in a statute are presumed to be superfluous. The rule applies when.--
(1) the statute contains an enumeration of specific words;
(2) the subjects of enumeration constitute a class or category;
(3) that class or category is not exhausted by the enumeration;
(4) the general terms follow the enumeration; and
(5) there is no indication of a different legislative intent.
In cases where the particular words can belong to a broad based genus it is not open to confine them to a narrower genus so as to limit the meaning of the general words. It is essential for application of the ejusdem generis rule that enumerated things before the general words must constitute a category or a genus or a family which admits of a number of species or members. It is requisite that there must be a distinct genus, which must comprise more than one species. The specific words must form a distinct genus or category. If the specified things preceding general words belong to different categories, this principle of construction will not apply. Further, mention of a single species does not constitute a genus.
If the preceding words and the general words in question constitute description of two categories or genera or the general words in question in themselves constitute description of a distinct category, the rule will have no application. The rule of ejusdem generis has to be applied with care and caution. It is not an inviolable rule of law, but it is only permissible inference in the absence of an indication to the contrary and where context and the object and mischief of the enactment do not require restricted meaning to be attached to words of general import, it becomes the duty of the Courts to give those words their plain and ordinary meaning. The rule of ejusdem generis has no inverse application general words preceding the enumeration of specific instances are not governed by this rule and their import cannot be limited by any such principle.
A Constitution Bench of the Apex Court in the case of The State of Bombay Vs. Ali Gulshan, explaining the application of this rule held as under at para 8:
(8) With great respect, we are constrained to say that the ''ejusdem generis'' rule or construction, which found favour in the Court below for reaching the result that the words "any other public purpose" are restricted to a public purpose which is also a purpose of the State, has scarcely any application. Apart from the fact that the rule must be confined within narrow limits, and general or comprehensive words should receive their full and natural meaning unless they are clearly restrictive in their intendment, it is requisite that there must be a distinct genus, which must comprise more than one species, before the rule can be applied.
If the words "any other public purpose", in the Statute in question have been used only to mean a State purpose, they would become mere surplusage; Courts'' should lean against such a construction as far as possible.
Therefore, it is clear that before the said rule is made applicable, there must be a distinct genus, which comprises of more than one species, which is conspicuously missing in this case. Consequently, it was held unless the amounts are actually incurred in connection with the execution of the works contract, the assessee is not entitled to the benefit of deduction. There cannot be any quarrel with the said proposition as is clear from the expressions or words in the provision but to confine it to the words ''actually incurred'' to the payment of hire runs counter to the language employed in the aforesaid provisions. Sub-clause (iv), on which reliance is placed categorically states that 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 the works contract. When machinery and equipments are used in the execution of a works contract generally, the machinery used is in substitution of physical labour. The machinery deployed in the execution of the work may be procured on hire or by paying charges. Therefore, the assessee is entitled to such amounts equal to labour charges and other like charges. That may be measured with reference to the hire charges paid and in the case of machinery acquired by purchase, the labour charges is to be calculated. Keeping in mind the hire charges paid for such machinery if it had been taken on hire and also the labour charges, which would have been incurred if the assessee do not possess the said machinery or equipment, the same could be calculated. Therefore, the word ''otherwise'' clearly signifies that entitlement of the assessee to the deduction of labour and other like charges as the machinery was actually involved in the execution of the works contract. Any other interpretation would run counter to the law declared by the Apex Court in the case of Gannon Dunkerley and Co. and Others Vs. State of Rajasthan and Others, . In fact the relevant portion of the said judgment is as under:
With regard to the determination of the value of the goods which are involved in the execution of a works contract the submission of the learned Counsel appearing for the State is that a more convenient mode for such determination is to take the value of the works contract as a whole and deduct therefrom the cost of labour and services rendered by the contractor during the course of execution of the works contract. The submission of the learned Counsel is that this mode would prevent evasion of tax. The learned Counsel for the contractors have submitted that in that event the following deductions should be made from the value of the entire contract in order to arrive at the value of the goods involved in the execution of a works contract:
(i) labour charges for execution of the works;
(ii) amounts paid to a sub-contractor for labour and services;
(iii) charges for planning, designing and architect''s fees;
(iv) charges for obtaining on hire the machinery and tools used in the execution of the works contract;
(v) cost of consumables such as water, electricity, fuel etc;
(vi) transportation charges for transport of goods to the place of works;
(vii) overhead expenses of the head office and branch office including rents, salary, electricity, telephone charges, etc. and interest charges to banks and financial institutions;
(viii) profits expected on such contract.
Keeping in view the legal fiction introduced by the Forty-sixth Amendment whereby the works contract which was entire and indivisible has been altered into a contract which is divisible into one for sale of goods and other for supply of labour and services, the value of the goods involved in the execution of a works contract on which tax is leviable must exclude the charges which appertain to the contract for supply of labour and services. This would mean that labour charges for execution of works item (i), amounts paid to a sub-contractor for labour and services item (ii), charges for planning, designing and architect''s fees item (iii), charges for obtaining on hire or otherwise machinery and tools used in the execution of a works contact item (iv), and the cost of consumables such as water, electricity, fuel etc., which are consumed in the process of execution of a works contract item (v) and other similar expenses for labour and services will have to be excluded as charges for supply of labour and services. The charges mentioned in item (vi) cannot, however, be excluded. The position of a contractor in relation to a transfer of property in goods in the execution of a works contract is not different from that of a dealer in goods who is liable to pay sales tax on the sale price charged by him from the customer for the goods sold. The said price includes the cost of bringing the goods to the place of sale. Similarly, for the purpose of ascertaining the value of goods which are involved in the execution of a works contract for the purpose of imposition of tax, the cost of transportation of the goods to the place of works has to be taken as part of the value of the said goods. The charges mentioned in item (vii) relate to the various expenses which form part of the cost of establishment of the contractor. Ordinarily the cost of establishment is included in the sale price charged by a dealer from the customer for the goods sold. Since a composite works contract involves supply of materials as well as supply of labour and services, the cost of establishment of the contractor would have to be apportioned between the part of the contract involving supply of materials and the part involving supply of labour and services. The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of material involved in the execution of the works contract only can be included in the value of the goods. Similar apportionment will have to be made in respect of item (viii) relating to profits. The profits which are relatable to the supply of materials can be included in the value of the goods and the profits which are relatable to supply of labour and services will have to be excluded. This means that in respect of charges mentioned in items (vii) and (viii), the cost of establishment of the contractor as well as the profit earned by him to the extent the same are relatable to supply of labour and services will have to be excluded. The amounts so deductible would have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor. 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:
(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;
(h) profit earned by the contractor to the extent it is relatable to supply of labour and services.
The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor.
In fact the Legislature has used the same words as the words used in the said judgment at clause (d). In view of Article 366(29-A)(b), the State Legislatures are competent to impose tax on the transfer of property in goods involved in the execution of works contract and under Article 286(3)(b) Parliament has been empowered to make law specifying restrictions and conditions with regard to the system of levy, rates and other incidents of such tax. Therefore, in the case of a works contract, it is now possible to tax the value of the goods involved in the execution of the works contract and therefore, what the assessee has to pay under the Act is only tax on the value of the goods and the assessee is entitled to the benefit of deduction in respect of the remaining portion of the cost involved in the execution of the works contract. If that principle is kept in mind, when an assessee instead of taking the machinery and tools on hire, he purchases the machinery and tool and employs them in the execution of the works contract, he is entitled to deduction, which represents the labour charges, in substitution of which the machinery and tools were employed. The same cannot be denied to him. Therefore the findings recorded by the authorities on this aspect cannot be sustained and the assessee is entitled to deduction even in respect of his own machinery employed in execution of the works contract. However, the question is; when own machinery and tools are employed, what is the measure of charges, which is to be deducted?
As held by the Apex Court in the aforesaid judgment, the amounts deductible under the said head will have to be determined in the light of the facts of a particular case on the basis of the material produced by the Contractor. Therefore, the Assessing Authority has to consider the material produced by the assessee on record keeping in mind that for deploying the same machinery and tools, if it had been taken on lease what is the hire charges, which he should have paid and also take into consideration other circumstances, which may be relevant to the case on hand and determine the amount deductible under the aforesaid head. For that purpose, the said question requires to be remitted back to the Assessing Authority for fresh computation.
Point No. 2
As is clear from the aforesaid provisions, the assessee is entitled to the benefit of charges for planning, designing and architect fees as well as the cost of establishment to the extent relatable to the supply of labour and service and other similar expenditure relatable to the supply of labour and services. The case of the assessee is for execution of the project at Kaiga, the Architects and other staff worked in the Regional Office as well as in the Head Office and they have been paid and therefore, it forms part of the cost of execution of the works contract and hence, the assessee is entitled to the benefit of deduction of the said amount. However, while putting forth the claim, they have not given the actual amount spent and evidence substantiating the said claim. What they have done is, to claim 3% of the total cost on established expenditure as the amount incurred in execution of the works contract. That is not permissible. Whatever amount the assessee wants to claim under the aforesaid heads, he has to furnish the particulars and proof of the same and on considering the same, the Assessing Authority shall grant the benefit under the aforesaid provisions. Therefore, though the authorities cannot be found fault with for not granting the deduction under the aforesaid head on percentage basis, it would be just and proper to give an opportunity to the assessee to produce before the authorities the actual amount spent for the said on-going project with legal proof and then the Assessing Authority shall consider the same in accordance with law.
Point No. 3
The approach of the authorities that the assessee has not put forth any claim at all in the assessment order for the period 1997-1998, there is no direction by the authorities to carry over the expenses and therefore, the assessee is not entitled to the said benefit is untenable. It is a case of misreading the order passed by the Assessing Authority. The assessment order for the period 1997-1998 was before the authority. The authority makes a reference of the same. According to the authority, the said order does not contain the claim made by the assessee and there is no order by the Assessing Authority directing for carrying over of the excess expenditure. The said order clearly states that the assessee''s claim under the head labour and other charges in a sum of Rs. 9,14,49,077/- at page 7, clause (6) and the assessee was only claiming Rs. 5,76,30,391/- for the current year and wanted the balance amount to be carried over to the subsequent year. Therefore, the say that the assessee has not put forth his claim is not correct. If the Assessing Authority, on going through the same has accepted the deduction to the extent of Rs. 5,71,08,577/-, a duty was cast on him to specifically mention in the order that the remaining amount is to be carried over to the next year. If the Assessing Authority has not performed his duty, which is expected of him in law, the benefit offered by the Legislature to the assessee, cannot be denied. Therefore, all the three authorities have not properly applied their mind, have not looked into the assessment order of the year 1997-1998 and unjustly denied the said benefit to the assessee. In that view of the matter, the finding recorded by the three authorities on that point requires to be set aside. Now that we are remitting the matter to the Assessing Authority, he shall look into the said order afresh and grant the benefit to which the assessee is entitled to in law. For the aforesaid reasons, we pass the following order:
(a) Appeals are allowed.
(b) The impugned order is hereby set aside.
(c) The matter is remanded back to the Assessing Authority for fresh disposal in accordance with law after hearing the assessee, keeping in mind the observations made in this order.
Parties to bear their own cost.