State of Karnataka vs Trim Export (Private) Limited, Bangalore

H.L. Dattu, J.-The State''s revision petition before this Court inter alia calling in question the correctness or otherwise of the orders made by the Karnataka Appellate Tribunal, Bangalore, in STA No. 915 of 1999, dated 16-6-2000. By the said order, the Tribunal has set aside the orders passed by the Joint Commissioner of Commercial Taxes (Appeals), Bangalore and also the orders of assessment passed by the Assessing Authority for the assessment year 1997-98. While allowing the appeal, the Tribunal in its order has observed as under:

"The appeal is allowed. The orders of both the Authorities below are hereby set aside and quashed. The case is remanded back to the Assessing Authority with a direction to pass fresh assessment order accepting the returns filed by the appellant".

The brief facts are.-

The respondent herein is a registered dealer both under the provisions of the Karnataka Sales Tax Act, 1957 and the Central Sales Tax Act, 1956 ("KST Act or CST Act" for short). The respondent is executing the works contract of printing and dyeing on the sarees supplied by the customers. For this purpose, the assessee uses certain commodities like chemicals, dyes, inks, colours, etc., in the works contract executed by him. The Assessing Authority while quantifying the tax liability of the petitioner has brought the turnover of dyes, chemicals, inks, etc., into the tax net. While determining the taxable turnover under Section 5-B of the Karnataka Sales Tax Act, 1957, the Assessing Authority has taken into consideration the purchase of materials made in the course of inter-State Trade or Commerce as well as from unregistered dealers in the State and added gross profit at 20% to such purchase of Rs. 25,94,251/-. The Assessing Authority had also levied a penalty of Rs. 2,13,331/- under the Act, since the appellant had carried out works contract liable to tax under Entry 34 of Sixth Schedule to the Act and such taxable turnover was not declared and tax paid thereon.

Aggrieved by the said order, the respondent herein had carried the matter in appeal before the First Appellate Authority. The First Appellate Authority while agreeing with the findings of the Assessing Authority, has modified/enhanced the quantified tax liability payable by the assessee, on the ground that the Assessing Authority has failed to do the assessment as per Section 5-B of the Act read with Rule 5 of the Karnataka Sales Tax Rules and also in accordance with the principles laid down by the Supreme Court.

The assessee being aggrieved by the orders passed by the First Appellate Authority, who has dismissed the appeal filed before him against the orders passed by the Assessing Authority for the assessment year 1997-98, had approached the Karnataka Appellate Tribunal in appeal STA No. 915 of 1999.

Before the Tribunal, the learned Counsel for the appellant had contended that the appellant is purely engaged in executing the works contract of printing and dyeing on the sarees supplied by his customers and in that process had used certain commodities like chemicals, dyes, inks, colours, etc., and therefore, it cannot be said that the appellant has done any business of buying and selling those goods but has utilised those goods in executing the works contract and as such there was no sale of any of those goods and no property in those goods have been transferred from the appellant to his customers.

At this stage itself, we should notice that the appellant in the memorandum of appeal filed before the Appellate Tribunal had taken exception to the order passed by the First Appellate Authority in enhancing the taxable turnover and the tax more than what was determined by the Assessing Authority. The contention in this regard was as under:

"5. The Assessing Authority has arbitrarily mooted to determine the taxable turnover at Rs. 33,61,624/- and levied tax at Rs. 2,13,331/- as per the FAO dated 27-5-1999, besides levying penalty under Section 12(4) at Rs. 2,13,331/-. This order was disputed before the First Appellate Authority. Surprisingly instead of allowing nor remanding the matter to the Assessing Authority the First Appellate Authority has enhanced the taxable turnover and the tax more than what was determined by the Assessing Authority by adopting the method of computation unknown to the procedure of law misinterpreting the Supreme Court ruling in the Builders Association of India v Union of India, (1989)73 STC 370 (SC): 5 SCST 5506: AIR 1989 SC 1371: (1989)2 SCC 645, and Gannon Dunkerley and Company v State of Rajasthan, (1993)88 STC 204 (SC). In other words, First Appellate Authority has administered parallel Sales Tax judgment and the Rule 6(4)(m)(n) of the KST Rules without proper understanding and has been acted solely as a Revenue Authority and not as Appellate Authority in the judicious discipline. The First Appellate Authority has computed the taxable turnover at Rs. 7,79,700/- usurping the jurisdiction of the Assessing Authority/Revisional Authority in the guise of modification of Assessment".

The Tribunal without going into the details of the grounds of appeal raised by the appellant before it, has proceeded to dispose of the appeal following the observations made by the Supreme Court in Rainbow Colour Lab and Another v State of Madhya Pradesh and Others, 2001(50) Kar. L.J. 189 (SC). The Tribunal in its order, concludes as under:

"9. From the above judgment of the Apex Court, it is quite evident that in the works contract of labour and service, if some goods were utilised incidentally, there will not become any transfer of property in the course of sale. Here, in the instant case, it is quite obvious that the appellant has utilised certain goods, which were required to complete his contract of labour and service. Thus, the goods are incidentally utilised in completing this work of labour and service and this cannot be treated as transfer of property as held by the Apex Court of India. Thus, following the Hon''ble Apex Courts decision, we have no hesitation in accepting the contention of the appellant in this case, to treat his transactions as one of the labour and service only, which is not exigible to tax and the goods utilised in this work of labour and service are incidental to the main job work as mentioned above".

Aggrieved by the order made by the Tribunal, the revenue is before this Court in this revision petition.

The questions of law framed for consideration and decision of this Court are:

"I. Whether the Karnataka Appellate Tribunal is right in law in treating the contract of dyeing and printing executed by the assessee as one of the labour and service only which is not exigible to tax?

II. Whether the Tribunal is right in holding that the goods utilised in the works contract and tranferred in the execution of works contract are incidental to the main job work?"

At this stage, we should notice that when the Tribunal decided the lis between the parties, only decision that was available on the point was the decision of the Apex Court in Rainbow Colour Lab''s case. Therefore, the Tribunal without going into the other details of the case, in our opinion, rightly following the law laid down by the Supreme Court had allowed the assessee''s appeal. We should also make it clear that the decision now relied upon by the learned Government Advocate, Sri Anand, in the case of Associated Cement Companies Limited v Commissioner of Customs, (2001)124 STC 59 (SC), was not available to the Tribunal while deciding the appeal before them.

In Associated Cement Companies Limited''s case, the Supreme Court has referred to the law declared by the Apex Court in Rainbow Colour Lab''s case. After referring to the said decision, has expressed its doubt with regard to the law declared by the Apex Court in Rainbow Colour Lab''s case. The Supreme Court in Associated Cement Companies case has stated as under:

"In arriving at the aforesaid conclusion the Court referred to the decisions of this Court in Hindustan Aeronautics Limited v State of Karnataka, (1984)55 STC 314 (SC): AIR 1984 SC 744: (1984)1 SCC 706 and Everest Copiers v State of Tamil Nadu, (1996)103 STC 360 (SC): AIR 1996 SC 2662: (1996)5 SCC 390. But both these cases related to pre-Forty-sixth Amendment era where in a works contract the State had no jurisdiction to bifurcate the contract and impose sales tax on the transfer of property in goods involved in the execution of a works contract. The Forty-sixth Amendment was made precisely with a view to empower the State to bifurcate the contract and to levy sales tax on the value of the material involved in the execution of the works contract, notwithstanding that the value may represent a small percentage of the amount paid for the execution of the works contract. Even if the dominant intention of the contract is the rendering of a service, which will amount to a works contract, after the Forty-sixth Amendment the State would now be empowered to levy sales tax on the material used in such contract".

(emphasis supplied)

Since the law declared by the Supreme Court in Rainbow Colour Lab''s case is now explained by the Apex Court in its subsequent decision, viz., Associated Cement Companies case, the order passed by the Tribunal relying upon the Rainbow Colour Lab''s case, requires reconsideration. Therefore, the order of the Tribunal requires to be set aside and the matter requires to be remanded to the Tribunal for reconsideration of the appeal filed by the assessee in the light of the observations made by the Apex Court in Associated Cement Companies case.

However, Sri S.V. Subramanyam, learned Counsel for the respondents would submit that in Tata Consultancy Services v State of Andhra Pradesh, (2001)122 STC 198 (SC), the Apex Court has doubted the correctness of the law declared by the Supreme Court in Associated Cement Companies case and therefore, has referred the matter for decision by a larger Bench and till such time, this Court need not dispose the present revision petition filed by the revenue. This submission of the learned Counsel, in our view, is not correct. The subject-matter in Tata Consultancy Services case, was whether the Andhra Pradesh High Court was justified in holding that branded software were ''goods'' as defined in Section 2(h) of the Andhra Pradesh Sales Tax Act, 1957, but unbranded software could not be treated as ''goods''. Keeping in view the importance of the matter having global implication, the Apex Court has referred the matter for decision by a larger Bench. Nowhere in the order, the Supreme Court has doubted the correctness or otherwise of law laid down by the Supreme Court in Associated Cement Companies case. Therefore, the request of the learned Counsel cannot be accepted.

Sri Subramanyam, the learned Counsel further submits that though appellant had questioned the correctness or otherwise of the action of the First Appellate Authority in enhancing the taxable turnover and quantifying the tax liability than what was determined by the Assessing Authority, the same could not be argued before the Tribunal since the primary question namely, the levy of sales tax on the value of material involved in the works contract had been answered in favour of the assessee in Rainbow Colour Lab''s case and therefore, an opportunity should be afforded to the assessee to urge the aforesaid issue before the Tribunal. In our opinion, the learned Counsel for the assessee is justified in making this request, after carefully perusing the grounds of appeal in the memorandum of appeal filed before the Tribunal and also the orders passed by the Tribunal. In our view, if the request made is granted, if would not cause any prejudice to the revenue.

In view of the above, the following:

ORDER (i) Revision petition is allowed.

(ii) The order made by the Karnataka Appellate Tribunal in STA No. 915 of 1999, dated 16-6-2000 following the observations made by the Apex Court in Rainbow Colour Lab''s case is set aside.

(iii) The Tribunal is directed to restore the appeal filed by the assessee in STA No. 915 of 1999 disposed of on 16-6-2000 to its file and reconsider the issues raised before it in the light of law laid down by Supreme Court in Associated Cement Companies case, after affording an opportunity of hearing to both the parties.

(iv) All the other contentions of both the parties are left open. Ordered accordingly.