M/S LEIGHTON INDIA CONTRACTORS PVT LTD V. DEPUTY COMMISSIONER OF COMMERCIAL TAXES

WP/46807/2016

AI Insights

The case involves M/s. Leighton India Contractors Pvt. Ltd., which challenged the reassessment order and demand notice issued by the Deputy Commissioner of Commercial Taxes, alleging that VAT was improperly levied on a service contract. The petitioner argued that the contract was a pure service contract, exempt from VAT under the Karnataka Value Added Tax Act, as the materials used were consumables and there was no transfer of property in goods. The respondents contended that the petitioner had executed a works contract, making it liable for VAT. The court dismissed the writ petition, emphasizing the availability of an alternative remedy through the appellate authority under the KVAT Act.

• Counselvise Citation: [2017] 140 COUNSELVISE.COM (IT) 726939 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 22-02-2017
• Assessment Year: misc
• Other Referred Cases: Gannon Dunkerley & Co vs. State of Rajasthan
• Laws Referred To: Karnataka Value Added Tax Act, Finance Act 1994
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: T VEDAMURTHY
• Assessee Lawyers: V
• Keywords: Jurisdiction; Reassessment order; Service tax; Tax liability; VAT; Works contract
• Section: 69; 3; 45(1); 39(1); 35(1); 35(4)

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 22ND FEBRUARY, 2017 BEFORE THE HON’BLE MR. JUSTICE L.NARAYANA SWAMY WRIT PETITION Nos.46807 & 47320-30/2016 (T-RES) BETWEEN: M/s.Leighton India Contractors Pvt.Ltd., Formerly known as M/s.Leighton Welspun Contractors Pvt Ltd., A company incorporated under the Companies Act, 1956 having its Registered office at Tower No.3, 7th Floor, Equinox Business Park, Off BKC, LBS Marg, Kurla (West), Mumbai 400 070 and Branch office at Door No.4-152/14, Sri Ram, I Floor, Kottara Chowki, Mangalore 575 006 Represented by its Authorizzed Signatory, Sri Deepak Chaudhari, S/o Sri Bhagwati Prasad Chaudhari, Aged 40 years, Petitioner (By Sri V Lakshminarayana – Senior Counsel for Vani H Associates – Advocates) AND: 2 1. Deputy Commissioner of Commercial Taxes (Audit-4), Divisional VAT Office, Maidan Road, Mangaluru 575 001. 2. State of Karnataka, Ministry of Finance, Represented by its Secretary, Vidhana Soudha, Ambedkar Veedhi, Bengaluru 560 001. 3. The Assistant Commissioner, Service Tax, Division – II, Mumbai – VII Commissionerate, 2nd Floor, Estrella Battery Compound, Labour Camp, Mutunga, Mumbai 400 0f19. Respondents (By Sri T K Vedamurthy – HCGP for R1 & R2) THESE WRIT PETITIONS ARE FILED TO DECLARE THAT THE R-1 HAS NO JURISDICTION TO LEVY VAT ON THE GROSS AMOUNT RECEIVED BY PETITIONER FROM M/S. ENGINEERS INDIA LTD., CONSEQUENT UPON THE EXECUTION OFPURE SERVICE CONTRACT VIDE ANNEXURE-A., etc., THESE WRIT PETITIONS COMING ON FOR FINAL HEARING AND AFTER HEARING HAVING RESERVED ON 08.12.2016 AND COMING ON FOR PRONOUNCEMENT, THIS DAY, THE COURT MADE THE FOLLOWING: 3 ORDER The petitioner is aggrieved of the reassessment order passed by the first respondent under Section 39(1) of Karnataka Value Added Tax Act, hereinafter referred to as `KVAT Act’ for short, and the consequent demand notice in Form VAT 180 even dated 30.6.2016 for the year 2011-12 vide Annexures-D & E. The petitioner has prayed for quashing the reassessment order and the demand made and also for quashing the endorsement dated 5.8.2016 issued by the first respondent under Section 69 of KVAT Act and such other reliefs. 2. The case of the petitioner is that petitioner is carrying on the business of execution of contracts both service contracts as well as works contracts. The petitioner has been filing returns of turnover regularly declaring the turnover as exempt since there is no transfer of property in goods by the petitioner. As the turnover is exempted, petitioner is not liable to tax 4 under the KVAT Act and therefore question of petitioner claiming deductions under the provisions of Rule 3(2) of the Karnatakak Value Added Tax Rules, 2005, hereinafter referred to as `the Rules’ for short does not arise. 3. The petitioner was awarded a contract by Engineers Indian Limited, for installation and commissioning of one Single Point Mooring (SPM) System off the coast of Mangalore; and laying of 1219 mm (48”) diameter offshore crude oil pipeline for offloading of crude and feeding to the refinery, approximately 17.4 k.m. long from SPM / PLEM to land fall point (LFP) at Mangalore, in the State of Karnataka vide detailed letter of acceptance dated 11.7.2011. The Mangalore Refinery & Petrochemicals Limited (MRPL, for short) undertook expansion of its refinery capacity under MRPL-Phase-III for which there was a requirement of crude of 18 MMTPA. Therefore, MRPL proposed to install one SPM system and associated 5 pipeline for offloading of crude and feeding to refinery. As a part of this, it was intended to develop an offshore crude oil handling facility including SPM, associated submarine and onshore pipeline system to handle the crude requirements for refinery at Mangalore. Therefore, MRPL intended to install the following systems for uploading/loading/transportation of crude oil through VLCC up to 3,20,000DWT: (a) Single Point Mooring (SPM) System off Mangalore (located 32 meter below chart datum); and (b) 1219 mm (48”) diameter offshore crude oil pipeline, approximately 17.4 Km., long from SPM/PLEM to Land Fall Point (LFP) at Mangalore in the State of Karnataka. 4. Engineers India Limited is the main contractor for the above works which sub-contracted the installation of SPM Systems and submarine pipelines to the petitioner vide tender agreement dated 11.7.2011. 6 The total contract price for these works was approximately at Rs.185,13,15,900/-. 5. From the nature of the work carried out by the petitioner, the materials required to be supplied by petitioner are consumables and are those which are incidental to the services rendered by the petitioner, such as machinery, nuts, bolts, gaskets, flanges, fittings, painting and coating materials, pipeline supports, etc., vis-à-vis the main SPM System and the submarine pipeline which were supplied by EIL for installation and commissioning by petitioner. Value of such goods supplied by the petitioner are of negligible value. It is settled law that no tax can be levied on the value of consumables which are used in the execution of works contract. There can be no tax levied on the machinery and tools deployed by petitioner in the execution of works contract since there is no transfer of property in goods. Further the terms at clauses 6, 7,8 & 9 in the agreement reflect the volume of services 7 rendered by the petitioner and thus making the contract one relating to services. The petitioner has declared the entire receipt under the provisions of the Finance Act 1994 and has paid the applicable service tax to the credit of the Central Government. The first respondent has failed to appreciate the aforesaid fact and thereby there is no application of mind. The service contract falls outside the scope of levy of VAT under Section 3 of KVAT Act. Thus the petitioner declared the total turnover of Rs.115,33,16,933/- for the year 2011-12 as exempt turnover. The contract executed by the petitioner was a service contract not amenable to the provisions of the KVAT Act since the contract is indivisible and that the State Legislature has no jurisdiction to levy VAT on the value of service contracts. The entire value of the contract is amenable to service tax under the provisions of Finance Act, 1994 read with Entry 92C of List I. The petitioner has discharged service tax on the entire receipts in terms of 8 Finance Act, 1994. It is stated by the petitioner that value of goods deemed to have been transferred in the course of execution of the service contract is negligible and most of the goods purchased by petitioner and used in the execution of service contract are consumables or goods for temporary usage and machinery/tools which cannot be brought to tax. The labour and like charges incurred by petitioner are duly accounted in the books of accounts which are audited and therefore the said expenditure should be allowed after due verification of the books of the accounts. The purchase turnover of the goods cannot be determined based on the mere declarations for e-sugam transactions. The value of goods incorporated in the works can be ascertained from the books in order to levy VAT on the said turnover and therefore there is no need to take into account the entire contract amount received during the year for the purpose of determination of VAT liability. However, the first respondent proceeded to conclude the 9 reassessment by confirming the propositions made in the show cause notice without application of mind and by misunderstanding the proposition of law. The impugned reassessment order determines the total turnover at Rs.115,33,16,933/- and taxable turnover at Rs.80,73,21,853/- as against the finding of fact as regards the total purchase value of goods at Rs.26,64,91,615/-. Even if the petitioner is held liable to pay VAT the taxable value of goods is only Rs.2,41,20,485/- and nothing beyond that. The first respondent has levied VAT at 14% on the entire taxable turnover which is beyond the legislative power of State and thus violative of Articles14 read with Entry 54 of List I. The first respondent has also levied VAT on the service tax of RS.10,76,98,680/- paid by the petitioner. Thus the petitioner is demanded a sum of Rs.11,30,25,059/-, Rs.6,79,70,996/- and Rs.1,13,02,507/- towards tax, interest and penalty by 10 issue of demand notice in Form VAT 180 dated 30.6.2016. 6. The application filed by the petitioner dated 23.7.2016 for rectification under Section 69 of KVAT Act, which came to be rejected on the ground that there is no mistake apparent on record that requires rectification. It is stated that generation of e-Sugama forms is mandatory for transportation of any goods or machinery, tools etc and the same need not be for the purposes of sale. The first respondent failed to appreciate that the value mentioned therein could not be considered as the value of transfer of property in goods that is liable to be taxed. The first respondent has not given reasonable opportunity to the petitioner to furnish the detailed reconciliation statement and the books of accounts in support of the aforesaid contention. 7. It is stated, apart from hire charges petitioner has incurred labour charges for execution of work, 11 payments to sub contractors, engineering/consultation charges such as drawings, survey, etc., cost of consumables, expenses towards trenching/dredging and backfilling, etc., and other similar expenses related to supply of skilled labour and services. Such expenditure is allowable as a deduction while determining the value of transfer of property in goods for the purposes of levy of sales tax or VAT by the Apex Court in Gannon Dunkerly & Co vs., State of Rajasthan, reported in 88 STC 204 SC. 8. It is stated by the petitioner that the issue involved only pertains to levy of VAT on the gross amounts received for the taxable service rendered by the petitioner. The question to be considered by this Court is, whether the petitioner is liable to pay VAT on the payments, which do not fall within the ambit of `works contract’ as defined under the Act. It is stated, the dispute between the parties involves interpretation of constitutional provisions, applicability of doctrine of 12 pith and substance, the theory of exclusiveness as found in article 246(1) of the Constitution of India and, therefore, it is submitted that notwithstanding the alternate remedy available under the statute, this is a fit case where this Court should entertain this writ petition and interpret these statutory and constitutional provisions. 9. The respondents have filed objection statement contending that the writ petitions are not maintainable and are liable to be rejected on the ground of alternative remedy of appeal available to the petitioner before the Joint Commissioner of Commercial Taxes (Appeal) under Section 62 of KVAT Act. It is submitted that the petitioner has carried out works contract. The petitioner filed monthly return in VAT-100 Form and declared total turnover at Rs.115,33,16,933.00 and declared NIL taxable turnover. There is purchase of construction materials to the tune of Rs.5,91,62,239.00 by the petitioner as per Form VAT-100 and Form VAT 13 240. The petitioner asserted that he is a sub-contractor executed certain works in favour of main contractor – Engineers India Limited. After due verification of the work order and monthly return, the Assessing Authority came to the conclusion that petitioner is willfully not declaring taxable turnover as required under Section 35(1) of the Act by filing VAT-100 Form. Therefore, the Assessing Authority took up the matter for re- assessment under Section 39(1) of the Act for the assessment year 2011-12. After receipt of reply, the Assessing Authority concluded re-assessment and passed order directing the petitioner to pay a sum of RS.19,22,98,562.00 as per Demand Notice. 10. It is contended that subsequent to award of contract by the main contractor, the petitioner – Assessee has executed total work of around Rs.115 crores. The petitioner filed monthly returns and declared turnover and does not declare taxable turnover. After noticing this discrepancy, the Assessing 14 Authority took up the matter for reassessment. The Assessing Authority has categorically recorded the reason that the Company has transported various goods as per the corresponding delivery notes (E-sugam used for transporting the goods on line by the petitioner), these details are uploaded to the Department website by the petitioner company itself. The said value i.., Rs.37,78,21,431/- is not reflected in Form –VAT 100 nor in Form – VAT – 240 by the company. The clarification given by the petitioner to the proposition notice did not match in respect of purchases made by it. The petitioner has been given sufficient opportunity to reconcile the E-sugam use by them. Hence the contention of the petitioner that they could not reconcile is wrong and an afterthought. The petitioner could have reconciled such details while filing application under Section 69 of the KVAT Act. The books of Accounts also do not show such goods movement or procurement of such goods by purchase or 15 by stock transfer receipts. The said issues are discussed in length in the re-assessment order. In spite of granting sufficient opportunity, the petitioner company failed to reconcile the transactions and failed to arrive at the actual transactions. Further the petitioner has explained the details of material transferred in response to the pre-assessment notice. The petitioner has not claimed the entire turnover as exempted in their reply to the notice of the Assessing Authority. They themselves accepted the fact of transfer of property in goods and conceded that the turnover to the extent there is transfer of property in goods, as explained above, may be subjected to levy of VAT under the KVAT Act. 11. The contention of the petitioner that the entire contract is a service contract is contrary to the Companies own record as submitted by itself as per the accounts. Even in the application under Section 69 of the Act, the petitioner requested for exemptions under 16 Rule 3(2) of the Rules. The petitioner requested for such deductions without substantiating the evidence prescribed under the Act. The claims made by the petitioner were contradictory and not supported by proper evidences. 12. It is observed in the Assessment order that the company has not submitted proof of payment of service tax by the main contractor nor by the petitioner. There were “17 contracts” running simultaneously in India during the assessment period. To which project what is the exemption and which is the service tax component is not disclosed. The assertion that the petitioner has paid service tax is not borne out from the records maintained by it. The assessee did not maintain actual accounts and submitted the same before the Assessing Authority to extend the benefit of deductions required under Rule 3(2)(1) of the Act. Thus incorporating all these interaction committed by the petitioner, the 17 assessing authority concluded the assessment. No proof is produced regarding sub-contract. 13. The petitioner did not file revised return as required under Section 35(4) of the Act. Failure on the part of the petitioner to comply the demand created as per the order under Section 39(1) and left with no other alternative, the Assessing Authority initiated recovery proceedings and one mode of recovery by the Assessing Authority envisaged under Section 45(1) of the Act by issuing notice to the petitioner –Bankers. The petitioner in the guise that it is paying service tax, petitioner is not liable to pay VAT is not correct in view of categorical documents produced by it before the Assessing Authority. The Assessment Officer has categorically recorded a finding that even in spite of crores of rupees project work has been done by the petitioner, which attracts tax under Section 4(1)(c) of the Act, still interim order is granted, which is not sustainable in law. Hence he prays for dismissal of the writ petition. 18 14. I have heard the learned counsel for the parties and perused the papers made available. It is contended on behalf of the petitioner that it has undertaken the service contract and service tax having been paid, petitioner is not liable to pay VAT. There is no transfer of property in goods and materials were supplied by the main contractor and the petitioner has executed the contract work. The most of the materials purchased by the petitioner were consumables and transfer of property in goods is negligible. This consumable goods, before assessing the same, the exemptions provided under Dunkerly & Co.,’s case referred to supra, should have been classified. The assessing authority should have considered 8 categories of exemptions enumerated by the Apex Court relating to labour and like charges etc., to be extended to the turnover. Whether the goods listed either under clause 4(1) or 4(2) it is for the petitioner to satisfy by placing materials. The assessing authority failed to verify the 19 records and failed to afford sufficient opportunity to the petitioner. The relief sought for by the petitioner is in the form of declaration and further requires interpretation by this Court. It is to be declared that the petitioner is not amenable to the respondent for payment of tax under the Act. The action on the part of the assessing authority is in violation of the principles of natural justice. This court is required to declare liability of the petitioner to pay VAT apart from paying service tax and hence the writ petition is maintainable even in place of an alternative remedy of appeal is provided in the statute. 15. On the other hand, the learned HCGP submits that there is an alternative remedy of appeal before the Joint Commissioner of Commercial Taxes (Appeals) and when there is an alternative remedy, ordinarily the writ petition is not maintainable before this court. The petitioner has executed works contract and its contention that service tax is paid is not substantiated. 20 Further the contention of the petitioner that it is not liable to pay VAT having paid service tax is not correct. The amounts mentioned in e-sugam is neither reflected in Form –VAT 100 nor in Form – VAT – 240 by the company. The petitioner failed to file revised returns after receipt of the proposed notice. Hence the petitioner is not entitled to any relief in the writ petitions. Thus prays for dismissal of the writ petitions. 16. The point that arises for consideration is, “Whether the writ petitions filed by the petitioner is maintainable in view of alternative remedy provided in Section 62 of the Act? My answer would be in the negative for the following reasons: 17. Before going further it is better to scan the law on the point of entertaining the writ petition when an effective alternative remedy is provided in the statute. This court in W P No.57922-933/2016 (T-RES) disposed 21 of on 10.11.2016 has observed a deterrent exercise of power under Article 226 of the Constitution when an efficacious alternative remedy is provided under the statute. Para-20 of the order is extracted for reference: “20. A lenient approach of the Court in this regard allowing writ petitions to be entertained against the assessment orders directly, is only likely to consume lot of precious public time of the Court, whereas, ultimately, after a detailed and time consuming analysis of facts, the Court may come to the conclusion that there is not even sufficient material before the Court to pronounce upon the individual contentions and factual issues raised before it. Therefore, this court is of the considered opinion that writ petitions against the assessment orders, where the concerned taxing law provides for appeal mechanism, cannot be usually entertained.” 18. This court has also held in the above order that the contingencies like, question of validity and vires 22 of the relevant statute or Rules or notifications involved, whether the assessee concerned has been saddled with the financial liability without any sort of opportunity of hearing given to him, is not to be lightly invoked in all such cases merely on the basis of the allegations and averments made in the writ petitions. 19. The contention of the petitioner is mainly on two points namely, there shall be declaration by this Court that petitioner is not amenable to VAT when it is carrying on service contract and service tax has been paid and secondly what it has purchased or procured are all consumables in the nature of work the petitioner is carrying on and the transfer of property in such goods is negligible. On such consumable goods, no VAT can be levied and therefore the petitioner is not liable to pay any VAT as demanded by the respondent Assessing Authority. The reliance is placed on a decision of the Apex Court in GANNON DUNKERLEY & CO. vs., STATE OF RAJASTHAN & OTHERS, reportedin (1993) 1 SCC 23 364. It is claimed on behalf of the petitioner that if there is transfer of property in goods, the Assessing Officer shall apply the 8 categories of exemptions mentioned therein. 20. In the instant case, there is a reassessment order after notice to the petitioner. The petitioner appeared before the Assessing Authority produced registers maintained by it and raised similar contentions that all goods, which were procured or purchased were consumable goods, consumed in the service contract, and therefore no VAT is payable by it. From the materials made available by the petitioner, the Assessing Authority did not agree with the contention of the petitioner and passed the reassessment order. Thereafter the petitioner filed an application seeking rectification of the reassessment order, which came to be rejected by issuing an endorsement. Therefore, it is not a matter where the matter involves constitutional validity of any provision in the Statute or irregularity in 24 the procedure adopted by the Assessing Authority going to the root of the matter or lack of competency, in which event, this court is alone the court to go into the said aspects of the matter. Here is a case where the petitioner has already participated and after the order goes against the petitioner, it cannot turn round and say that liability has to be decided by this Court and it has to be declared as such. The case on hand involves purely factual aspects with reference to legal provisions, which the appellate authority can as well go into and decide. The provisions of the KVAT Act are upheld and vires of the provisions is not in challenge in the instant case. 21. It is the contention of the petitioner that it is a composite contract between the parties, service contract as well as works contract. The petitioner has made available Form VAT 100 and claimed nil turnover and claimed no liability to pay tax. The said averment has been disputed by the respondent on the basis of the 25 registers and e-sugam forms and particulars submitted by the petitioner itself and came to the conclusion that the petitioner is amenable to VAT under the KVAT Act. It is also observed in the impugned order that the petitioner has not substantiated payment of service tax either by the petitioner or by its principal. So these disputed facts cannot be gone into under Article 226 of the Constitution of India. 22. Regarding availment of alternative remedy, the Hon’ble Supreme Court has observed in Para-15 of the judgment in COMMISSIONER OF INCOME TAX & OTHERS vs., CHHABIL DASS AGARWAL, reported in (2014) 1 SCC 603, which is extracted herein under: “15. Thus, while it can be said that this Court has recognised some exceptions to the rule of alternative remedy i.e. where the statutory authority has not acted in accordance with the provisions of the enactment in question, or in the defiance of the fundamental principles of judicial procedure, or has resorted to invoke the 26 provisions which are repealed, or when an order has been passed in total violation of the principles of natural justice, the proposition laid down in Thansingh Nathma's case, Titaghur Paper Mills case and other similar judgments that the High Court will not entertain a petition under Article 226 of the Constitution if an effective alternative remedy is available to the aggrieved persons or the statute under which the action complained of has been taken itself contains a mechanism for redressal of grievance still holds the field. Therefore, when a statutory forum is created by law for redressal of grievances, a writ petition should not be entertained ignoring the statutory dispensation.” 23. It is to be mentioned here that when an alternative remedy is available and petition is entertained by this Court, the petitioner later cannot approach the appellate authority by way of appeal or revision as the case may and thus petitioner would be to 27 its disadvantage. For this reason also, entertaining this writ petition without allowing the petitioner to avail the alternative remedy, is not in the best interest of the petitioner. 24. Even in case of violation of affording opportunity before the Assessing Authority, the appellate authority itself could consider the same and if it is satisfied that further opportunity need to be given to the petitioner, the appellate authority could afford such an opportunity to the petitioner. But without going into the factual aspects and without considering the merits of the matter which are disputed facts, it cannot be concluded one way or the other, for which writ petition is not the remedy. 25. In respect of the alternative remedy, the learned counsel referred the judgment of this Court reported in LAWS (KAR)-2011-2-5 (BHARTI AIRTEL LTD., vs., STATE OF KARNATAKA. In para 63, the court held that “the writ petitions raise questions 28 relating to the competence of the States to levy sales tax on telecommunication service. If the State Legislatures are incompetent to levy the tax, it would not only be an arbitrary exercise of power by the State Authorities in violation of Article 14, but also it would constitute an unreasonable restriction upon the right of the service providers to carry on trade under Article 19(1)(g) of the Constitution of India. The constitutional issues have to be decided exclusively by the High Court”. The ratio laid down in the said decision, cannot be disputed. But such a constitutional issue is not there in the present case to have exclusive jurisdiction by this Court. 26. Giving my anxious consideration to the submissions of both the parties, I am of the view that this is a case where alternative remedy has to be availed by the petitioner and accordingly, the writ petitions are not maintainable. In the result and for the reasons aforementioned, the writ petitions are dismissed reserving liberty to the 29 petitioner to avail of the alternative remedy of appeal before the Joint Commissioner of Commercial Taxes (Appeals). While considering the delay in filing the appeal, of course, the appellate authority has to take into consideration the pendency of matter before this Court. Sd/- JUDGE akd* "