M/S.Hekur vs. State Of Kerala
Original PDF →Facts
The revision petitioner, M/s. Hekur, engaged in works contracts for toughened glasses and ceiling boards, opted for compounding under Section 8(a)(i) of the Kerala Value Added Tax Act, 2003 (KVAT Act) for the assessment year 2012-13. The assessing authority initially granted permission. However, the Intelligence Officer (IB), Thrissur, initiated proceedings under Section 67 of the KVAT Act, alleging ineligibility for the compounded rate due to the transfer of materials in the form of goods, citing Annexure-C clarification. This led to penalty proceedings finalized by Annexure-D order. Subsequent revisions before the Deputy Commissioner (Annexure-E) and the Commissioner of Commercial Taxes (Annexure-F) upheld the penalty and the rate of tax, respectively. The petitioner filed this revision petition against these orders.
Held
The Court held that the authorities below, including the Intelligence Officer and subsequent appellate/revisional authorities, failed to consider the subsequent Supreme Court judgment in Kone Elevator India Pvt. Ltd. v. State of Tamil Nadu & Others [(2014) 71 VST 1 (SC)]. This judgment overruled the earlier decision in Kone Elevators (India) Ltd. [(2005) 140 STC 22(SC)] and clarified that composite contracts for supply and installation, involving significant labour and skill, should be treated as works contracts, not mere contracts for sale of goods. The Court found that the authorities had not properly appreciated the quantum of labour and civil works involved in the installation of the petitioner's products. Consequently, the impugned orders (Annexures D to F) were set aside. The matter was remanded to the Intelligence Officer (IB), Thrissur, for reconsideration in light of the Kone Elevator India Pvt. Ltd. (supra) judgment, with a direction to pass a fresh order within one month after affording an opportunity of hearing to the petitioner and allowing the petitioner to produce relevant materials within two weeks.
Key Issues
1. Whether the revision petitioner is eligible for the benefits under Section 8(a)(i) of the KVAT Act, considering the nature of the works contract and the materials involved. 2. Whether the works undertaken by the revision petitioner constitute a contract for sale of goods or a works contract where the transfer of material is not in the form of goods, thereby determining eligibility for the compounded tax rate. The petitioner argued that the goods involved, such as toughened glasses and ceiling boards, were custom-made for the specific works contract and could not be used elsewhere. They contended that the Intelligence Officer relied on the Supreme Court's decision in State of Andhra Pradesh v. Kone Elevators (India) Ltd. [(2005) 140 STC 22(SC)], which was later overruled by a Larger Bench in Kone Elevator India Pvt. Ltd. v. State of Tamil Nadu & Others [(2014) 71 VST 1 (SC)]. The petitioner also cited this Court's judgment in State of Kerala v. P.C. Kurian [(2019) 65 GSTR 338 (Ker)] to support their claim. The Revenue, through the Government Pleader, argued that the compounded rate is an alternate tax mode requiring compliance with mandatory provisions. They contended that the initial order was conditional, requiring the contract not to involve the transfer of material in the form of goods, and that the petitioner's contract did involve such transfer, justifying the penalty.
Sections Cited
Section 8, Section 67, Section 94, Rule 24
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
JUDGMENT SHOBA ANNAMMA EAPEN, J. The revision petitioner, an assessee under the Kerala Value Added Tax Act, 2003 (for short, “the KVAT Act”), is engaged in the execution of works contract relating to toughened glasses, ceiling boards etc. For the assessment year 2012-13, the revision petitioner opted for compounding as provided under Section 8 of the KVAT Act. The assessing authority, vide Annexure-B order, granted permission to pay tax under the compounding scheme as per Section 8(a)(i) of the KVAT Act and the tax was being paid accordingly. While so, the Intelligence Officer (IB), Thrissur initiated steps against the revision petitioner under Section 67 of the KVAT Act, alleging that the petitioner is not eligible for the benefits under Section 8(a)(i) of the KVAT Act and that the petitioner has to OT.REV NO. 48 OF 2017 ..3.. satisfy tax at the scheduled rate of 13.5%. Though objections were filed by the revision petitioner, the Intelligence Officer, relying on Annexure-C clarification issued by the authority under Section 94 of the KVAT Act, finalized penalty proceedings as per Annexure-D order. Aggrieved by Annexure-D order, the revision petitioner filed a revision petition before the Deputy Commissioner, Thrissur. The said authority, as per Annexure-E order, upheld the imposition of penalty. Thereafter, the petitioner filed a second revision before the Commissioner of Commercial Taxes, Thiruvananthapuram and as per Annexure-F order, the Commissioner rejected the revision petition with respect to the challenge against rate of tax. Aggrieved by the said orders, the present revision petition is filed before this Court.
We have heard the learned counsel for the revision petitioner as well as the learned
OT.REV NO. 48 OF 2017 ..4.. Government Pleader.
The questions of law purported to be raised in this revision petition are whether the revision petitioner is eligible for the benefits under Section 8(a)(i) of the KVAT Act and whether the works undertaken by the revision petitioner are in the form of goods or in some other form. In order to appreciate the contentions raised by the petitioner and the learned Government Pleader, it is necessary to advert to the relevant provisions contained in the KVAT Act. Section 8(a) reads thus:
“8. Payment of tax at compounded rates:- Notwithstanding anything contained in Section 6:- (a)(i) any works contractor not being a dealer registered under the provisions of the Central Sales Tax Act, 1956 (Central Act 74 of 1956) and who is not an importer may, at his option, instead of paying tax in accordance with the provisions of the said section, pay tax at three per cent of the whole contract amount; (ii) any works contractor not falling under clause (i) above may, at his option, instead of paying tax in accordance with the provisions of the said section, pay tax at eight per cent of the whole contract amount; Provided that notwithstanding anything contained in sub clause (ii) above, the compounded tax payable by any works contractor under this clause in respect of works contracts awarded by Government of Kerala, Kerala Water Authority or Local Authorities shall be four per cent of the whole contract amount; Provided further that the provisions of this clause shall not apply to any works contract in OT.REV NO. 48 OF 2017 ..5.. which the transfer of material is in the form of goods.”
The learned counsel for the revision petitioner submits that the petitioner is involved in the execution of works contract and the goods involved are toughened glasses, ceiling boards etc., and the petitioner obtained work orders as per Annexure-A series, for execution of works contract not in the form of goods. Subsequently, the petitioner opted for payment of tax under the compounded rate under Section 8 of the KVAT Act, which was allowed by the assessing authority and the payment was made accordingly. It was submitted by the learned counsel for the revision petitioner that solely relying on the law laid down by the apex court in State of Andhra Pradesh v. Kone Elevators (India) Ltd. [(2005)140 STC 22(SC)], the Intelligence Officer (IB), Thrissur imposed penalty against the petitioner holding that the petitioner is not eligible for the benefit of compounded rate under OT.REV NO. 48 OF 2017 ..6.. Section 8(a)(i) of the KVAT Act since the activity of the petitioner is works contract, in which transfer of material is in the form of goods making it ineligible as per the second proviso to Section 8(a)(ii) of the KVAT Act. The learned counsel for the revision petitioner submits that the goods involved in the execution of works contract are custom made and it cannot be used for any other purpose and all the authorities failed to appreciate the fact that Kone Elevators(India) Ltd.(supra) was later overruled by a Larger Bench of the apex court in Kone Elevator India Pvt. Ltd. v. State of Tamil Nadu & Others [(2014) 71 VST 1 (SC)]. Therefore, according to the learned counsel, on the basis of the subsequent judgment of the apex court, the proceedings initiated against the petitioner has only to be dropped. The learned counsel further relied on the judgment of this Court in State of Kerala v. P.C.Kurian [(2019) 65
OT.REV NO. 48 OF 2017 ..7.. GSTR 338 (Ker)], wherein the subsequent judgment of the apex court in Kone Elevator India Pvt. Ltd.(supra) [(2014) 71 VST 1 (SC)] was considered and the contract for providing and fixing superior quality polyvinyl chloride outdoor stadium chairs of specified size was found to be a composite contract and not sale of goods, entitled for securing tax at compounded rate.
Per Contra, the learned Government Pleader, placing reliance on the judgment of this Court in IT Johny v. State of Kerala [CDJ 2007 Ker HC 108] and on a Full Bench decision of this Court in OT Rev.No.84/2018 and connected cases, submitted that the compounded rate of tax is an alternate mode of tax. It was further submitted that the revision petitioner has to comply with the mandatory provisions and the learned Government Pleader further submitted that Annexure-B order was a conditional order and it clearly specifies that returns shall be submitted
OT.REV NO. 48 OF 2017 ..8.. as per Rule 24 of the Kerala Value Added Tax Rules, 2005 along with payment of tax and that the contract shall not involve transfer of material in the form of goods. According to the learned Government Pleader, since the works contract of the revision petitioner was transfer of material in the form of goods, the Intelligence Officer rightly interfered and imposed penalty, finding that the revision petitioner is not eligible for payment of tax under the compounding scheme.
We have gone through the entire records produced in this case. On a perusal of Annexure-D order, it is clear that the Intelligence Officer had imposed penalty relying on Annexure-C proceedings of the authority for clarification, which was issued on the basis of the law laid down by the apex court in Kone Elevators (India) Ltd.(supra) [(2005) 140 STC 22(SC)]. The Intelligence Officer as well as the subsequent
OT.REV NO. 48 OF 2017 ..9.. authority has not considered the dictum laid down in Kone Elevator India Pvt. Ltd.(supra) [(2014) 71 VST 1 (SC)] while deciding the issue, wherein it was held as follows; “Coming back to Kone Elevators (supra), it is perceivable that the three-Judge Bench has referred to the statutory provisions of the 1957 Act and thereafter referred to the decision in Hindustan Shipyard Ltd. (supra), and has further taken note of the customers’ obligation to do the civil construction and the time schedule for delivery and thereafter proceeded to state about the major component facet and how the skill and labour employed for converting the main components into the end product was only incidental and arrived at the conclusion that it was a contract for sale. The principal logic applied, i.e., the incidental facet of labour and service, according to us, is not correct. It may be noted here that in all the cases that have been brought before us, there is a composite contract for the purchase and installation of the lift. The price quoted is a composite one for both. As has been held by the High Court of Bombay in Otis Elevator (supra), various technical aspects go into the installation of the lift. There has to be a safety device. In certain States, it is controlled by the legislative enactment and the rules. In certain States, it is not, but the fact remains that a lift is installed on certain norms and parameters keeping in view numerous factors. The installation requires considerable skill and experience. The labour and service element is obvious. What has been taken note of in Kone Elevators (supra) is that the company had brochures for various types of lifts and one is required to place order, regard being had to the building, and also make certain preparatory work. But it is not in dispute that the preparatory work has to be OT.REV NO. 48 OF 2017 ..10.. done taking into consideration as to how the lift is going to be attached to the building. The nature of the contracts clearly exposit that they are contracts for supply and installation of the lift where labour and service element is involved. Individually manufactured goods such as lift car, motors, ropes, rails, etc. are the components of the lift which are eventually installed at the site for the lift to operate in the building. In constitutional terms, it is transfer either in goods or some other form. In fact, after the goods are assembled and installed with skill and labour at the site, it becomes a permanent fixture of the building. Involvement of the skill has been elaborately dealt with by the High Court of Bombay in Otis Elevator (supra) and the factual position is undisputable and irrespective of whether installation is regulated by statutory law or not, the result would be the same. We may hasten to add that this position is stated in respect of a composite contract which requires the contractor to install a lift in a building. It is necessary to state here that if there are two contracts, namely, purchase of the components of the lift from a dealer, it would be a contract for sale and similarly, if separate contract is entered into for installation, that would be a contract for labour and service. But, a pregnant one, once there is a composite contract for supply and installation, it has to be treated as a works contract, for it is not a sale of goods/chattel simpliciter. It is not chattel sold as chattel or, for that matter, a chattel being attached to another chattel. Therefore, it would not be appropriate to term it as a contract for sale on the bedrock that the components are brought to the site, i.e., building, and prepared for delivery. The conclusion, as has been reached in Kone Elevators (supra), is based on the bedrock of incidental service for delivery. It would not be legally correct to make such a distinction in respect of lift, for the contract itself profoundly speaks of obligation
OT.REV NO. 48 OF 2017 ..11.. to supply goods and materials as well as installation of the lift which obviously conveys performance of labour and service. Hence, the fundamental characteristics of works contract are satisfied. Thus analysed, we conclude and hold that the decision rendered in Kone Elevators (supra) does not correctly lay down the law and it is, accordingly, overruled.”
On a perusal of the orders under challenge, it is clear that the authorities concerned have failed to appreciate the quantum of labour involved and the quantity of civil works carried out for the installation of the products in the building after making necessary infrastructure. Hence, on an entire consideration of the facts of this case, we are of the view that the matter has to be relegated to the original authority for reconsideration in the light of the subsequent judgment of the apex court in Kone Elevator India Pvt. Ltd.(supra) [(2014) 71 VST 1 (SC)]. In the result, this O.T.revision petition is disposed of. The impugned orders, Annexures D to F, are set aside. The Intelligence Officer (IB),
OT.REV NO. 48 OF 2017 ..12.. Thrissur, is directed to reconsider the issue afresh in the light of the judgment of the apex court in Kone Elevator India Pvt. Ltd.(supra) [(2014) 71 VST 1 (SC)] within a period of one month from the date of receipt of a certified copy of this judgment with notice to the petitioner and also after affording an opportunity of hearing to the petitioner. The petitioner is also given liberty to produce all materials before the said authority so as to justify the contentions within two weeks. SHAJI P. CHALY JUDGE SHOBA ANNAMMA EAPEN JUDGE bka/-
OT.REV NO. 48 OF 2017 ..13..
Appendix — schedule of exhibits
Reproduced from the public record of the Kerala High Court. Verify against the court's own copy before relying on it. Income tax judgments are on bharattax.net.