D Y CHANDRACHUD,J. - (1.) The State of Karnataka is in appeal from a judgment of a Division Bench of the High Court dated 28 September 2012. The issue before the High Court related to the rate of tax applicable to works contracts prior to 1 April 2006 when Section 4(1)(c) was introduced by an amendment into the Karnataka Value Added Tax Act 2003 ('KVAT Act 2003').
(2.) The respondent is engaged in executing civil works contacts and is registered both under the KVAT Act and the Central Sales Tax Act . It purchases building materials like hardware, sand and bricks falling under the Third Schedule to the KVAT Act, declared goods under Section 15 of the CST Act and other non- scheduled goods from within and outside the State and from unregistered dealers. On 31 January 2006 it made an application before the Authority for Advance Clarification and Ruling ('AAR') for guidance on the rate of tax applicable for the execution of civil works contracts under the KVAT Act. The AAR held by its order dated 2 August 2006 that since there was no specific entry providing for the rate of tax on works contracts up to 31 March 2006, tax on goods used in the execution of works contract should be levied in accordance with the rate of tax applicable to the sale of goods under the KVAT Act 2003. The relevant part of the order is extracted below: ".correctly understood that there is no specific entry providing rate of tax on works contract under KVAT Act, up to 31-3-2006 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. Therefore, as regards the rate of tax on the deemed sales of goods involved in the execution of works contract, it is to be clarified that tax is payable at the rate applicable to the Sale of Goods Act upto 31.03.2006. And by KVAT (Amendment) Act, 2006, Clause (c ) has been got inserted to section 4(1) w.e.f. 1.4.2006, for levy of tax in respect of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, and appending VI Schedule to the Act, listing out the items/descriptions of the works contract with the rate of tax corresponding to them. As per entry 23 of the said schedule, "all other work contracts not specified in any of the above categories including composite contracts with one or more of the above categories" are liable to tax @ 12.5% w.e.f. 01.04.2006. The civil works contract falls under the said entry and therefore, is liable to tax @ 12.5% only. Hence, it is clarified accordingly."
(3.) The dealer sought a further clarification on the issues that were raised in the original application about the rate of tax on iron and steel used in the execution of civil works contracts. By its ruling dated 7 December 2006, AAR held that the rate of tax applicable on iron and steel is 4 per cent when used in the same form, otherwise the rate of tax would be 12.5 per cent.;