T M PRABHAKARAN NAIR Vs. STATE OF KERALA
LAWS(KER)-2003-6-43
HIGH COURT OF KERALA
Decided on June 05,2003

T M PRABHAKARAN NAIR Appellant
VERSUS
STATE OF KERALA Respondents

JUDGEMENT

G. SIVARAJAN, J. - (1.) ASSESSEE is the revision petitioner. State is the respondent. Assessment year concerned in 1993-94. For the said assessment year the assessee filed a return disclosing a total and taxable turnover of Rs. 8,64,756. 25 and nil respectively. The assessee claimed exemption in respect of the entire turnover on the ground it represented receipt of works contract and the materials used in the works contract had already suffered tax inside the State. The assessing officer, however, did not accept the said contention in full, and had determined the taxable turnover at Rs. 3,24,920, after granting deduction in respect of the materials already suffered tax. The Deputy Commissioner, Commercial Taxes, Alappuzha, however, initiated suo motu proceedings under section 35 of the Kerala General Sales Tax Act, 1963 (for short "the Act") and set aside the assessment on the ground that a scrutiny of the assessment records revealed that the assessee was manufacturing mosaic tiles in his factory using raw materials purchased from inside and outside the State, and then the mosaic tiles are taken to work sites for laying on contract basis. According to the Deputy Commissioner, the deemed sales of mosaic tiles by the contractor to the awarder was liable to be assessed to tax under the Act. It was also noted that the mosaic tiles manufactured by the assessee are liable to tax at the point of first sales and the same has not suffered tax. Being aggrieved by the said order, the assessee filed appeal before the Sales Tax Appellate Tribunal, Additional Bench, Kottayam. The Tribunal confirmed the order of the Deputy Commissioner, holding that the petitioner is charging for the mosaic tiles and the labour, viz. , laying and polishing of the mosaic tiles. It was also observed that the assessee is manufacturing mosaic tiles, which is taxable at the point of first sales, using the goods purchased by him, and then transferring the mosaic tiles so manufactured in the execution of the works contract. It was further observed that what is transferred in the works contract is the mosaic tiles and not the raw materials and the deemed sale of mosaic tiles by the assessee was not assessed to tax.
(2.) DR. K. B. Muhamed Kutty, learned counsel appearing for the assessee, submits that the assessee had entered into contract with various parties for mosaic flooring and that it is only in the execution of such contracts the assessee purchased raw materials and had converted the same to mosaic tiles. It was also stated that the mosaic tiles so made by the assessee was used in execution of the contract. Counsel submitted that in such situation there is no question of taxing the intermediate product, viz. , mosaic tiles. Counsel relied on the decision of a single Judge of this Court in Sivanandan v. State of Kerala (1994) 2 KTR 256, particularly the observations made in paragraphs 34 and 35 occurring at page 272 of the said report. Counsel accordingly submitted that both the Deputy Commissioner and the Tribunal had erred in holding that the assessee is liable to tax on the turnover of mosaic tiles used in the execution of the works contract. We have also heard the learned Government Pleader appearing for the respondent. He submits that the assessee is having a factory, in which he is engaged in the manufacture of mosaic tiles, and that the contracts entered into by the assessee with various parties were for supply of mosaic tiles and for laying and polishing the same, and therefore, by virtue of the provisions of section 5 (1) (iv) of the Act the turnover of mosaic tiles supplied by the assessee for the purpose of execution of the works contract was rightly held to be taxable under section 5 of the Act. Government Pleader also took us through the order of the Deputy Commissioner, wherein he had referred to the assessment records, which revealed the manufacture of mosaic tiles. Government Pleader further submitted that both the Deputy Commissioner and the Tribunal had entered a finding that the assessee had supplied mosaic tiles to the awarder and the same was used in the execution of the contract. Government Pleader, accordingly, sought to sustain the orders of both the Deputy Commissioner and the Tribunal. We have considered the rival submissions. According to us, none of these authorities has considered the question in proper perspective. We find that both the Deputy Commissioner and the Tribunal had entered the finding that the assessee had supplied mosaic tiles for the purpose of execution of the contract work. We do not find any material considered by the authorities to show that the contract was one for supply of mosaic tiles and for laying and polishing the same. If, as a matter of fact, the contract is one for supply of mosaic tiles and for laying the same in the building belonging to the awarders in view of section 5 (1) (iv) (a) of the Act, the turnover of mosaic tiles used in the execution of the works contract is exigible to tax at the point of first sale in the State. Since, admittedly, the mosaic tiles are stated to have been manufactured by the assessee and used the same in the execution of the works contract, the sales turnover is liable to tax at the hands of the assessee. On the other hand, if the contract was one for mosaic flooring simpliciter, and if the assessee purchased raw materials and, incidentally, converted the same into mosaic tiles for the purpose of execution of the contract, it cannot be said that the intermediate product, viz. , mosaic tiles manufactured by the assessee for the purpose of execution of the contract of mosaic flooring, be made liable to tax under the Act. A learned single Judge of this Court, in Sivanandan's case (1994) 2 KTR 256 mentioned above, considered a similar situation in paragraphs 34 and 35 of the said judgment, which reads as follows : " 34. What the 40th amendment has done is to disintegrate an indivisible contract into a devisible one, of sale of the various components involved in the execution of the work. That means there is a deemed sale of every item of goods involved in the work. The conversion of the goods by processing or manufacture, during the course of the work, or for purpose of the work is immaterial and irrelevant, as what the amendment permits is a levy of tax on the basis goods, and not on the intermediate products. In fact, the contract is an indivisible one by which the awarder bargains for the execution or execution of a work, as such, and what is permitted to be taxed in the turnover of goods involved in the execution of that work. The conversion of the goods, into intermediate products, before being imbedded, will not detract from the fact that so far as the contractor is concerned, the transfer is of the basic components or goods involved in the execution of the work. It is on these that article 366 (29a) (v) permits levy of tax, which must therefore follow the disciplines prescribed in the Act, the C. S. T. Act, 1956 and in the Constitution regarding sales or purchase of those goods. The contractor cannot be denied the benefits of exemption, total or partial, or lower rate of tax, because he embedded the materials in the work after converting them into some other intermediate category of goods. That is what the offending words in the two provisos seek to do. They are therefore bad. 35. The position as it stands under the provisos is like this. Iron and steel which have been used by the contractor in the making of a window grill, or a trellis work, or a truss; or cement, and iron and steel used for making a pile which is driven into the foundation; or timber made into doors and windows, which are subsequently used in the work, will be liable to be taxed (though otherwise non-liable exempt), merely because they have undergone a process of processing or manufacture before being used in the work. This, in my opinion, is not correct. The transformation which these goods undergo at the hands of the contractor for the purpose of the execution of the work is liable to be eschewed in considering whether they are liable to tax or not. They cannot be treated differently, and denied the benefits otherwise available to them, merely because they have been subjected to processing or manufacture in the course of the work. Nor do the intermediate goods become liable to be taxed separately. The limitation contained in the two provisos is therefore unconstitutional and void. "
(3.) AS already pointed out, the basic facts to be found for application of the legal position mentioned above is as to what exactly is the works contract for. In other words, whether the assessee has entered into a contract for supply of mosaic tiles, its laying and polishing; or whether the contract is one for mosaic flooring simpliciter. AS already noted, both the authorities have not referred to any material to show the nature of the contract, except to say that the assessment records show that the assessee had manufactured mosaic tiles and used the same in the execution of works contracts. Of course, the assessee had produced a piece of material, which is a sample quotation, as annexure B, which may indicate many things. Whether the contract is of the same nature, is also a matter to be considered. It is only after coming to a definite finding on the question mentioned, the legal position pointed out in this judgment can be applied. Hence, we set aside the order of the Tribunal and direct the assessing officer concerned to consider the said question as directed in the order of the Deputy Commissioner, untrammelled by any of the observations made therein, and in the light of the legal position stated in this judgment. The T. R. C. is disposed of as above. Petition disposed of accordingly. .;


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