The Hon’ble Kolkata High Court in case of Durga Projects Inc. v The State of Karnataka 2013 40 Taxmann.com 408 (Kar.) has held that provisions of section 4(1)(c) of the Karnataka Value Added Tax Act, 2003 (hereinafter referred to as “the KVAT Act”) levying tax on works contract by specifying specific rate of tax under Sixth Schedule will be applicable only with effect from 01 March 2006 and for the period up to 31 March 2006, tax should be levied as per the rate applicable on the value of each class of goods involved in execution of works contract.
In the present case, the Appellant made an application before the Authority for Clarification and Advance Rulings (“the ACAR” in short) seeking clarification in respect of applicability of the rate of tax on execution of civil works contract under the Karnataka Value Added Tax Act, 2003 in which the ACAR came to a conclusion that there is no specific entry providing rate of tax on works contract under the KVAT Act up to 31 March 2006 and therefore, tax should be levied as per the rate applicable on the value of each class of goods involved in the execution of works contract.
The Commissioner of Commercial Taxes after noticing the clarification order passed by the ACAR found that the order passed by the ACAR is erroneous and prejudice to the interest of the revenue and held that the goods used in the works contract cannot be treated on par with the normal sale of goods for the purpose of arriving at the rate for the period prior to 01 April 2006 and will be subjected to tax under the section 4(1)(b) of the KVAT Act.
The Kolkata High Court held that the order passed by the Commissioner is contrary to law. The sale under the works contract is a deemed sale of transfer of the goods alone and it is not different from the normal sale. Hence the tax has to be levied on the price of the goods and material used in the work contract as of there was a sale of goods and materials. The property in the goods used in the work contract deemed to have been passed over to the buyer as soon as the goods or material used are incorporate to the immovable property by principle of accretion to the immovable property.
Hence, For the period prior to 01 April 2006, tax is to be levied as per the section 3(1) of the KVAT Act and for the period subsequent to 01 April 2006, tax has to be levied as per section 4(1)(c) of the KVAT Act.
Atul Kumar Gupta
B Com (Hons) FCA, FCMA, MIMA, CIQA, PGDEMM
Central Council Member of ICAI (2013-16)
Former Chairman NIRC of Institute of Chartered Accountants of India
Former Chairman NIRC of Institute of Cost Accountants of India
Author of “An Introduction to Service Tax” & “Comprehensive Guide to Service Tax”
M: 9810103611 E: email@example.com