29 August 2016
EY Tax Alert
2012
SC holds that ‘iron and steel’ incorporated in works are declared
goods
Executive summary
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This Tax Alert gives an update on the recent decision of the Supreme Court (SC) in
the case of Smt B Narasamma vs. Deputy Commissioner Commercial Taxes
Karnataka1.
Issue before the SC was whether iron and steel products for reinforcement of
cement concrete used in buildings lose their character as iron and steel at the
point of taxability i.e. at the point of accretion in a works contract. SC also dealt
with the issue on rate of tax of declared goods [i.e. goods declared to be of special
importance under section 14 of the Central Sales Tax Act, 1956 (‘CST’)].
Apex Court observed as follows:
►
Two important propositions emerge on a conjoint reading of judicial
precedents in the case of Builders Association and M/s Gannon Dunkerley:
►
Works Contracts that are liable to be taxed after the 46 th Constitution
Amendment are subject to the drill of Article 286(3) read with section
15 of CST Act, namely, they are chargeable at a single point and at a
rate not exceeding 4% at the relevant time.
►
The point at which iron and steel products are taxable is the point of
accretion, that is, the point of incorporation into the building or
structure.
___________________
1
2016-TIOL-120-SC
Background
►
►
►
►
Appellant had used iron and steel
products in the execution of works
contracts for reinforcement of cement.
Iron and steel products become part of
pillars, beams, roofs, etc. which are all
parts of the ultimate immovable
structure that is the building or other
structure to be constructed.
Issue before the SC was whether such
iron and steel reinforcements of cement
concrete that are used in buildings lose
their character as iron and steel at the
point of taxability i.e. at the point of
accretion in a works contract.
Court also addressed the issue
concerning rate of taxability of declared
goods i.e. goods declared to be of special
importance under section 14 of the
Central Sales Tax Act, 1956 (‘CST Act’).
Appeals deal with provisions of the
Karnataka Sales Tax Act, 1957 (‘KST
Act’) and post 1 April 2005 to the
Karnataka Value Added Tax Act, 2003
(‘KVAT Act’).
Legislative provisions
►
►
Article 286(3) of the Constitution
imposes restrictions on any law of the
State w.r.t tax on the sale or purchase of
goods declared by the Parliament by law
to be of special importance in inter- state
trade or commerce.
As per section 14 of the CST Act, iron
and steel are declared to be goods of
special importance in inter-state trade or
commerce.
►
According to section 15 (a) of the CST
Act, tax on sale or purchase of declared
goods inside the State shall not exceed
4% or 5% of the sale or purchase price
thereof at the relevant time .
►
By virtue of 46th amendment of the
Constitution, Article 366(29A) was
inserted, through which it became
2
3
2002-TIOL-602-SC-CT-CB
2002-TIOL-103-SC-CT-CB
possible by a deeming fiction to tax sale
of goods involved in a works contract.
►
Declared goods were taxed under section
5(4) of Karnataka Sales tax Act (‘KST
Act’) and section 4 of Karnataka Value
Added Tax Act, 2003 (‘KVAT Act’).
Appellant’s contentions
►
Assessee placed reliance on SC’s ruling
in the case of Builders Association of
India vs. UOI2 and Gannon Dunkerley &
Co vs. State of Rajasthan3.
►
It argued that under KVAT Act, iron and
steel products that are reinforced for
cement concrete used in buildings and
structures, remain exactly the same
goods at the point of taxability i.e. the
point of accretion.
►
Mere cutting into shapes and bending
does not make these items lose their
identity as declared goods.
►
Accordingly, tax only at the rate of 4%
can be levied, and not at a higher rate
which is levied in respect of civil
construction works generally.
Revenue’s contentions
►
Placing reliance in the case of State of
Tamil Nadu vs. M/s Pyare Lal Malhotra
and others4 it argued that iron and steel
products did not continue as iron and
steel products but somehow became
different goods at the point of accretion.
Therefore, they could be taxed at the
higher rate applicable to civil
constructions.
►
It was further argued that if the iron and
steel products continued as declared
goods then even though they were in
works contract they were subjected to
the drill of section 15 of CST Act and
would be chargeable at 4% if it were
found that the said products continue to
remain the same.
4
1976 (1) SCC 834
Supreme Court ruling
►
SC observed that the matter is no longer
res integra.
►
Two important propositions emerge on a
conjoint reading of Builders Association
and M/s Gannon Dunkerley (supra):
►
►
►
►
►
Works Contracts that are liable to
be taxed after the 46th Constitution
Amendment are subject to the drill
of Article 286(3) read with section
15 of CST Act, namely, they are
chargeable at a single point and at a
rate not exceeding 4% at the
relevant time.
The point at which these iron and
steel products are taxable is the
point of accretion, that is, the point
of incorporation into the building or
structure.
SC in the case of Builders Association
had held that the restrictions and
conditions contained in section 15 of
CST Act on the power of the State to
levy tax on the sale of declared goods
apply equally to transfer of property in
goods involved in the execution of works
contract as they apply to ordinary sales.
SC in the case of Gannon Dunkerley held
that it is not permissible for the State
Legislature to impose a tax on goods
declared to be of special importance in
inter-State trade or commerce under
section 14 of CST Act except in
accordance with the restrictions and
conditions contained in section 15 of
CST Act.
SC has also discussed the factual
findings of the Karnataka Appellate
Tribunal arising out of one civil Appeal
order dated 18 October 2015 wherein
process by which the steel bar/rods of
different diameters are used as
reinforcements is laid down. Tribunal
had held that no pre-fabrication of any
steel structure is done before embedding
them in cement concrete to form
reinforced cement concrete structures
and that none of the processes
constitute ‘manufacture’. Also, no new
commodity is produced before
incorporation.
►
Judicial precedent in the case of Pyare
Lal Malhotra and Others (supra) squarely
covers the case against the State, where
commercial goods without change of
their identity as such, are merely subject
to some processing or finishing, or are
merely joined together, and therefore
remain commercially the same goods
which cannot be taxed again, given the
rigor of section 15 of CST Act.
►
With regard to another appeal filed by
the appellant, SC upheld High Court’s
decision in as much as the iron and steel
goods, after being purchased, are used
in the manufacture of other goods,
namely, doors, window frames, grills,
etc. which in turn are used in the
execution of works contract and
therefore not exempt from tax.
Comments
SC’s ruling, re-enforcing the
earlier judgements on taxability of
declared goods incorporated in
the execution of works contract,
leaves no room for any contrary
view on the subject.
Tax payer will need to identify all
such cases in litigation at various
stages for their early clearance,
seeking relief based on the Apex
Court ruling.
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