State of Karnataka vs Transglobal Power Limited

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 Karnataka Value Added Tax Act, 2003 (for short hereinafter referred to as ''the Act''). During the years 2005-2006 to 2007-2008, the assessee was engaged in execution of the works awarded by M/s. Karnataka Power Transmission Corporation Limited (for short hereinafter referred to as ''KPTCL'') for construction 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 4% on certain items and subjected to levy of tax at 12.5% on some goods. As there was some mistakes in the reassessment orders, the same were rectified by the order dated 27-2-2009 passed by the Prescribed Authority. The Joint Commissioner of Commercial Taxes (Administration), VAT Division 1, Bangalore, the Revisional Authority exercising his powers under Section 63-A of the Act reviewed the reassessment orders. It was held when the Prescribed Authority while concluding the reassessment has wrongly classified the taxable turnover and subjected to tax at 4% which were incorporated in the execution of work contracts of composite nature. According to the Revisional Authority from 1-4-2006, the works contract executed by the assessee falls in the Entry 23 of Sixth Schedule to the Act and is liable to pay tax at 12.5%. Therefore, he revised the order, modified the rectification order and subjected the work contractor turnover activity and levied tax at 12.5%. 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 4%. Aggrieved by the said order, the State has preferred these petitions.

Learned AGA 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 transaction in question as a works contract under Entry 23 of Sixth Schedule and the Tribunal has erred in treating the case as of sale and levying tax at 4% 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 it 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 reads as under:

"7.0 Construction of the contract.

6.1 Notwithstanding anything stated elsewhere in the bid documents, 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 portion will relate to the handling at the Site, storage, erection, construction, 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 turnover declared by the assessee is liable to tax at 4% in respect of scheduled goods. In respect of unscheduled goods, the tax levied at 12.5% 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 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 foundation for erecting towers. It was a case of work 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 4% and 12.5% 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 Tzmtrl/Dwa-103, dated 6-1-2005, 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 nonperformance 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 contract and therefore he treated this contract as a work 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, 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 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 nonperformance 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 do 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 composite contract, which are not divisible, such contract should be treated as work contract and levy should under Entry 23 of Sixth Schedule. 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 work contract and tax is levied under Entry 23 of Sixth Schedule. 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 assessee. We do not see any merit in these revision petitions. Accordingly, petitions are dismissed.

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 6% p.a.

In view of dismissal of the main petitions itself, IA No. I of 2013 for stay does not survives for consideration, the same is rejected.