STATE OF KARNATAKA AND ANR.versusM/S DURGA PROJECTS INC

                         [2018] 3 S.C.R. 115                          115


              STATE OF KARNATAKA AND ANR.                             A
                            v.
                  M/S DURGA PROJECTS INC
                    (Civil Appeal No.811 of 2018)
                          MARCH 06, 2018
                                                                      B
       [DIPAK MISRA, CJI, A. M. KHANWILKAR AND
                DR. D. Y. CHANDRACHUD, JJ.]
       Karnataka Value Added Tax Act, 2003 – s. 4(1)(c) and (b) –
Works contracts prior to 1.04.2006 – Rate of tax applicable – Held:
KVAT Act 2003 did not provide a uniform rate of tax prior to
01.04.2006 on goods involved in the execution of works contract –     C
It would be far-fetched to accept that in enacting s. 4(1)(b), the
legislature intended to prescribe a uniform rate of tax, prior to
1.4.2006, for goods incorporated in a works contract – Scheme
legislated upon in s. 4(1) envisaged specific rates of tax on goods
falling within the Second, Third and Fourth Schedules – Section       D
4(1)(b) provided a residual entry under which a rate of 12.5% was
provided ‘in respect of other goods’ – It was with effect from
1.04.2006 that the State legislature mandated a uniform rate of tax
on goods involved in the execution of works contracts as provided
in the Sixth Schedule – Position as it existed upto 31.03.2006 was
altered with effect from 1.04.2006 – It cannot be said that upto      E
31.03.2006, s. 4(1)(b) envisaged a uniform rate for the transfer of
goods involved in the execution of a works contract.
       Respondent-assessee, engaged in executing civil works
contacts, is registered both under the Karnataka Value Added
Tax Act, 2003 and the Central Sales Tax Act. It purchased building    F
materials 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, the respondent filed
an application before the Authority for Advance Clarification and
                                                                      G
Ruling (AAR) for guidance on the rate of tax applicable for the
execution of civil works contracts under the KVAT Act. The AAR
held that since there was no specific entry providing for the rate
of tax on works contracts up to 31.03.2006, 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   H
                                  115
116            SUPREME COURT REPORTS                      [2018] 3 S.C.R.


A     Act 2003. In revision, the orders of AAR were held to be
      erroneous. The High Court held that for the period prior to
      1.4.2006, tax has to be levied as per Section 3(1) of the Act and
      for the period subsequent to 1.4.2006, tax has to be levied as per
      Section 4(1)(c) of the Act. Hence, the present appeal.
B           Dismissing the appeals, the Court
            HELD : 1.1 Section 4 of the Karnataka Value Added Tax
      Act, 2003 imposes a liability to pay taxes upon every dealer on
      his taxable turnover. Besides imposing a liability, Section 4
      prescribes the rate of tax. The rate of tax on goods mentioned in
C     the Second, Third and Fourth Schedules was specified in sub-
      clauses (i), (ii) and (iii) of Section 4(1)(a). The Second Schedule
      at the material time attracted a rate of 1%, the Third Schedule
      4% and the Fourth Schedule, 20%. On ‘other goods’ the rate of
      tax was 12.5% under Section 4(1)(b). The expression ‘other
      goods’ in Section 4(1)(b) evidently means those goods which are
D     not governed by Section 4(1)(a). Where goods are specifically
      covered by any of the entries of the Second, Third and Fourth
      Schedules, such goods would be covered by the specific entry
      relating to those goods. Recourse to the residual provisions of
      Section 4(1)(b) would be available only in respect of ‘other goods’,
E     that is, goods which did not fall within the purview of s. 4(1)(a).
      [Para 15] [133-A-D]
            1.2 It would be far-fetched to accept that in enacting Section
      4(1)(b), the legislature intended to prescribe a uniform rate of
      tax, prior to 1.4.2006, for goods incorporated in a works contract.
F     The scheme legislated upon in Section 4(1) envisaged specific
      rates of tax on goods falling within the Second, Third and Fourth
      Schedules. What Section 4(1)(b) provided was a residual entry
      under which a rate of 12.5% was provided ‘in respect of other
      goods’. The expression ‘in respect of other goods’ meant goods
      other than those falling in the Second, Third and Fourth
G     Schedules. Declared goods specified in Section 14 of the Central
      Sales Tax Act, 1956 were comprehended in Serial No.20 of the
      Third Schedule to the KVAT Act 2003 and attracted a rate of 4%,
      which applied to goods in that Schedule. As a result of the deeming
      definition of the expression sale, a transfer of property in goods
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      STATE OF KARNATAKA AND ANR. v. M/S DURGA                         117
                   PROJECTS INC

involved in the execution of a works contract become exigible to       A
tax. Exigibiliy to tax, is distinct from the rate of tax and the
measure of the tax. In Gannon Dunkerly & Co, it was held that it
is open to the states to provide a uniform rate of tax on goods
transferred in the course of the execution of a works contract.
The exigibility to tax is not (as it cannot be) dependent on the
                                                                       B
state prescribing a uniform rate of tax for goods involved in works
contracts. That the KVAT Act 2003 did not provide a uniform
rate of tax prior to 01.04.2006 on goods involved in the execution
of works contract also becomes apparent when the amendment
which introduced Section 4(1)(c) by Act 4 of 2006 is read. As a
result of the amendment, the legislature provided that the rate        C
of tax in respect of the transfer of property in goods involved in
the execution of a works contract would be as provided in the
Sixth Schedule. The Sixth Schedule elucidates works contracts
of various descriptions and elucidates the associated rates of tax
for each distinct category. Declared goods involved in the
                                                                       D
execution of a works contract are taxable at the rates mentioned
in Section 15 of the CST Act while all other goods involved in the
execution of a works contract are taxable at the rate prescribed
in the Sixth Schedule upon the amendment. The amendment
introducing Section 4(1)(c) took effect on 1 April 2006. The
amendment is not clarificatory. It was with effect from 1 April        E
2006 that the State legislature mandated a uniform rate of tax on
goods involved in the execution of works contracts as provided
in the Sixth Schedule. The position as it existed upto 31 March
2006 was altered with effect from 1 April 2006. It cannot be said
that upto 31 March 2006, Section 4(1)(b) envisaged a uniform
                                                                       F
rate for the transfer of goods involved in the execution of a works
contract. Section 4 imposes the liability to pay tax on every dealer
who is or is required to be registered, on his taxable turnover.
The concept of taxable turnover in Section 2(34) is defined with
reference to the turnover on which a dealer is liable to be taxed,
determined after making deductions from the total turnover as          G
prescribed. The concept of taxable turnover thus incorporates
the expressions ‘turnover’ and ‘total turnover’, both of which
are defined in Sections 2(36) and Section 2(35) respectively. The
manner in which the total turnover of a dealer is computed is
prescribed in Rule 3(1)(b), in the case of a normal sale, and in
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118            SUPREME COURT REPORTS                        [2018] 3 S.C.R.


A     Rule 3(1)(c), for the purposes of a works contract. In the case of
      a works contract, deductions are envisaged under sub-rule (2) of
      Rule 3, which includes amounts such as labour and other charges.
      Section 7 provides that the sale of goods shall be deemed to
      have taken place at the time of the transfer of title or possession
      or incorporation of the goods in the course of the execution of a
B
      works contract. The interpretation placed on the provisions of
      the Act as they existed prior to 1.4.2006 is consistent with the
      plain meaning of the words used by the legislature. The submission
      that Section 4(1)(b), as it existed prior to 1.4.2006 was a catch-
      all entry providing for a uniform rate of tax on goods involved in
C     the execution of a works contract, cannot be accepted. Such a
      construction does not emerge from the plain meaning of the words
      used and is in fact belied by the need which was felt by the
      legislature to impose a uniform rate of tax only with effect from 1
      April 2006. The genesis of the instant dispute arises out of the
      proceedings which were initiated before AAR by the respondent
D
      seeking guidance on the applicable rate of tax on the law as it
      existed until 31.03.2006. This proceeding concludes the issue of
      interpretation. It is clarified by way of abundant caution, that issues
      of a factual nature, will fall for adjudication in the course of
      assessment proceedings. It was open to state legislatures to
E     provide uniform rates of tax on goods involved in the execution
      of works contracts. Many state legislatures did so. The Karnataka
      legislature did so with effect from 1.4.2006, not earlier. Thus,
      there is no merit in the challenge preferred by the State of
      Karnataka to the impugned judgment and order of the High Court.
      [Para 16 and 17] [133-E-G; 134-A-H; 135-A-F]
F
            Gannon Dunkerly & Co v. State of Rajasthan
            (1993) 1 SCC 364 : [1992] 3 Suppl. SCR 103 ; Dunlop
            India Ltd. v Union of India (1976) 2 SCC 241 :
            [1976] 2 SCR 98; Bharat Forge and Press Industries
            Pvt. Ltd. v. CCE (1990)1 SCC 532 : [1990] 1 SCR 60 ;
G           HPL Chemicals Ltd. v CCE (2006) 5 SCC 208 : [2006]
            1 Suppl. SCR 125 ; Balabhagas Hulaschand v. State of
            Orissa (1976) 2 SCC 44 : [1976] 2 SCR 939 ; Bansal
            Wire Industries Ltd. v. State of Uttar Pradesh (2011) 6
            SCC 545 : [2011] 7 SCR 416 – referred to.
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        STATE OF KARNATAKA AND ANR. v. M/S DURGA                             119
                     PROJECTS INC

                         Case Law Reference                                  A
[1992] 3 Suppl. SCR 103           referred to              Para 7
[1976] 2 SCR 98                   referred to              Para 7
[1990] 1 SCR 60                   referred to              Para 7
                                                                             B
[2006] 1 Suppl. SCR 125           referred to              Para 14
[1976] 2 SCR 939                  referred to              Para 6 (viii)
[2011] 7 SCR 416                  referred to              Para 6 (viii)
        CIVIL APPELLATE JURISDICTION : Civil Appeal No. 811 of               C
2018.
      From the Judgment and Order dated 28.09.2012 of the High Court
of Karnataka at Bangalore in S.T.A. No. 72 of 2010
                                  WITH                                       D
        Civil Appeal Nos. 812-817 of 2018.
     Devadatt Kamat, AAG, V. N. Raghupathy, Aditya Bhat, Rajesh
Inamdar, Javedur Rahman, Parikshit P. Angadi, Advs for the Appellants.
       S. K. Bagaria, Sr. Adv, Bharadwaj S. Iyengar, Vikas Upadhyay,         E
Vidit, K. Ajit Singh, L. Badri Narayanan, Aditya Bhattacharya, Ms. L.
Charnaya, Victor Das, Ms. Apeksha Mehta, Yogendra Aldak, Karan
Sachdev, M. P. Devanath, Advs for the Respondents.
        The Judgment of the Court was delivered by
                                                                             F
        DR. D. Y. CHANDRACHUD, J.
        CIVIL APPEAL NO 811 OF 2018:
        (Arising out of SLP(C) No 27048 of 2013)
      1. The State of Karnataka is in appeal from a judgment of a Division   G
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’).
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120             SUPREME COURT REPORTS                           [2018] 3 S.C.R.


A            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 ThirdSchedule 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
B
      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,
C     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
D           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,
E           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
F           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.”
G
              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
H     would be 12.5 per cent.
       STATE OF KARNATAKA AND ANR. v. M/S DURGA                                121
        PROJECTS INC [DR. D. Y. CHANDRACHUD, J. ]

        4. Subsequently,an order was passed in revision by the                 A
Commissioner of Commercial Taxes (Karnataka), Bangalore,holding that
the orders of AAR were erroneous and prejudicial to the interests of the
revenue. According to the Commissioner, there is a deemed sale in the
course of the execution of a works contract by incorporation of the
goods into the work. This is distinct from a normal sale of goods. In the
                                                                               B
case of a works contract, it is a conglomerate of goods that is transferred
and there is no sale of individual goods. According to the Commissioner,
both before and after the amendment of Section 4(1)(c) with effect
from 1 April 2006, tax is levied on the taxable turnover of goods involved
in the execution of a works contract. Taxable turnover in a works contract
is determined after allowing deductions from the total consideration           C
admissible under Rule 3(2) of the KVAT Rules 2005. On the other
hand, in the case of a normal sale of goods, the aggregate sale price paid
for a particular commodity constitutes the taxable turnover. The
clarification by AAR was held to be in error in assuming that individual
goods purchased for use in the execution of a works contract are
                                                                               D
transferred in the same form and in ruling that the rates of tax on taxable
turnover would be the rates applicable to each of the goods purchased.
The matter was kept open to be addressed by the assessing authorities
in accordance with law.
        5. The dealer preferred a sales tax appeal before the High Court
of Karnataka, aggrieved by the revisional order of the Commissioner of         E
Commercial Taxes. By its judgment dated 28 September 2012, the High
Court allowed the appeal and while setting aside the order in revision
held as follows:
      “The sale under the works contract is a deemed sale of transfer of
      the goods alone and it is not different from the normal sale. Hence,
                                                                               F
      the tax has to be levied on the price of the goods and material used
      in the works contract as if there was a sale of goods and materials.
      The property in the goods used in the works contract will be deemed
      to have been passed over to the buyer as soon as the goods or
      material used are incorporated to the moveable property by principle
      of accretion to the moveable property. Hence, we are of the view         G
      that the order passed by the Commissioner is contrary to law. For
      the period prior to 1-4-2006, tax has to be levied as per Section 3(1)
      of the Act and for the period subsequent to 1-4-2006, tax has to be
      levied as per Section 4(1)(c ) of the Act. Hence, the substantial
      questions of law are held in favour of the appellant.”
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122             SUPREME COURT REPORTS                            [2018] 3 S.C.R.


A            6. The submission which has been urged on behalf of the State is
      that although Section 4(1)(c) was introduced with effect from 1 April
      2006, all other provisions in relation to works contracts existed since the
      inception of the Act in 2003. The definitions of sale (Section 2(29)),
      goods (Section 2(15)), turnover (Section 2(36)), total turnover (Section
      2(35)) and taxable turnover (Section 2(34)) were a part of the parent
B
      legislation. The distinct mechanism for determination of total turnover in
      respect of a normal sale and deemed sale was also in existence prior to
      1 April 2006. Consequently, it has been urged on behalf of the State by
      MrDevadattKamat, that:
            (i) There cannot be any dispute that the KVAT Act envisaged a
C
      levy of tax on works contracts even prior to 01.04.2006;
             (ii) The rate of tax for works contracts prior to 01.04.2006 would
      fall under Section 4(1)(b), the residual entry. The residual entry prescribes
      the rate of tax for “other goods”, that is, goods which are not specified
D     under any of the schedules. The goods incorporated in a works contract
      also come within the ambit of the definition of goods under Section 2(15);
             (iii) In a deemed sale, the conglomerate of the goods or the value
      of the contract is to be taken as the amount of goods which are sold.
      This is specifically incorporated in Rule 3(c);
E            (iv) In case of a deemed sale, the concept of ‘total turnover’ is
      the total amount of consideration for the transfer of property in the goods
      and the same is in contradistinction to the concept of ‘total turnover’ in
      respect of a normal sale where it is the value of each goods;
             (v) The argument that prior to 01.04.2006 the rate of tax has to be
F
      levied on the individual goods comprised in the works contract would
      militate against the express provisions of the Act and the Rules in force
      which categorically lay down a distinct procedure for computation of
      the rate of tax in respect of works contracts [Rule 3(1)(c) read with
      Section 4(1), 2(34), 2(35) and 2(36)];
G
            (vi) The contention that the tax is leviable on individual goods in a
      works contract will render the entire scheme of the Act prior to
      01.04.2006 unworkable and would amount to abolishing the levy on works
      contracts prior to 01.04.2006;

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          STATE OF KARNATAKA AND ANR. v. M/S DURGA                                 123
           PROJECTS INC [DR. D. Y. CHANDRACHUD, J. ]

       (vii) The arguments of the Respondent would effectively render              A
Section 2(29) read with Rule 3(1)(c) completely redundant and otiose.
The taxable event in a deemed sale (See Section 7) is the time of
incorporation of the goods in the course of execution of the works contract.
Therefore, to relegate the determination of the rate of taxation to a period
anterior to the taxable event would render the entire scheme of taxation
                                                                                   B
under the KVAT Act otiose; and
        (viii) It is well settled that there is a presumption against redundancy
of a statutory provision [BalabhagasHulaschand v State of Orissa, (1976)
2 SCC 44]. Furthermore, the suggestion that individual goods are to be
taxed separately in a works contract amounts to re-writing the statute,            C
which is against the settled cannon of interpretation that in a taxing statute
nothing can be read in. [Bansal Wire Industries Ltd. V State of Uttar
Pradesh, (2011) 6 SCC 545].
      7. On the other hand, Mr SK Bagaria, learned senior counsel
appearing on behalf of the respondent supports the reasoning of the                D
High Court on the following grounds:
        (i) In the judgment of the Court in Gannon Dunkerly& Co v
State of Rajasthan1, it was held that the State legislatures may tax the
goods involved in execution of a works contract at a uniform rate, which
is different from the rates applicable to individual goods;                        E
       (ii) The KVAT Act was enacted in 2003 and its charging section
(Section 3) came into force on 1 May 2005. Though in Gannon
Dunkerly& Co (supra), this Court permitted State legislatures to tax
goods involved in the execution of works contracts at a uniform rate, the
legislature of Karnataka did not do so. No provision existed for a uniform         F
rate on all goods involved in the execution of works contracts until 31
March 2006;
       (iii) The above position was altered when Section 4 was amended
with effect from 1 April 2006 by Act 4 of 2006. As a result, in terms of
clause (c), subject to sections 14 and 15 of the CST Act, goods involved           G
in the execution of works contracts are liable to a uniform rate of tax,
depending upon the description of the works contract in the Sixth
Schedule;

1
    (1993) 1 SCC 364
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124            SUPREME COURT REPORTS                          [2018] 3 S.C.R.


A             (iv) In so far as declared goods are concerned, Section 4(1)(a)
      (ii) provided for a rate of 4% on goods mentioned in the Third Schedule.
      Serial No.20 of the Third Schedule refers to declared goods specified in
      Section 14 of the CST Act 1956. Hence, iron and steel which were
      declared goods specified in Section 14 of the CST Act were covered by
      the Third Schedule and were subject to tax at 4%; goods not covered by
B
      the Third Schedule were liable to tax at 12.5% under Section 4(1)(b);
             (v) After 01.04.2006, Section 4(1)(c) is made subject to Sections
      14 and 15 of the CST Act for declared goods. Hence declared goods
      involved in the execution of works contract are from 01.04.2006 taxable
      at the rates mentioned in Section 15 of the CST Act while all other
C     goods are taxable at a uniform rate under the Sixth Schedule. This
      amendment was made with effect from 01.04.2006 and there is no dispute
      for the period thereafter;
            (v) In so far as the rate of tax is concerned, as stated above,
      Section 4(1) of the KVAT Act as it stood during the relevant period i.e.
D     upto 31.03.2006 specifically provided for the applicable rates as under:
            (a) In respect of declared goods as specified in Section 14 of the
            CST Act @4% (Section 4(1)(a)(ii) read with Serial No.20 of Third
            Schedule);

E           (b)In respect of the goods mentioned in the Second, Third or Fourth
            Schedules at the respective rates mentioned in Section 4(1)(a)
            read with the said Schedules;
            (c) In respect of other goods, i.e. goods not covered by Section
            4(1)(a), @ 12.5% under Section 4(1)(b).
F            At that time i.e. upto 31.03.2006, there was no provision in the
      KVAT Act providing for a uniform rate in respect of goods supplied in
      execution of a works contract. In so far as the expression “other goods”
      in Section 4(1)(b) is concerned, it only meant and covered the goods
      other than those covered by Section 4(1)(a). The goods mentioned in
      the Second, Third or Fourth Schedules (in this case particularly iron and
G
      steel covered by Serial No.20 of Third Schedule) were specifically covered
      by the said Schedules and there could be no scope to consign these
      specific goods covered by the said Schedules to the residual entry “Other
      goods” in Section 4(1)(b). This position of law is well settled by the

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         STATE OF KARNATAKA AND ANR. v. M/S DURGA                            125
          PROJECTS INC [DR. D. Y. CHANDRACHUD, J. ]

judgments of this Court in Dunlop India Ltd. v Union of India2 and           A
Bharat Forge and Press Industries Pvt. Ltd. v CCE3.
      (vi) In Gannon Dunkerley’s case (supra) this Court held that it
is permissible for the State Legislatures to tax all goods involved in
execution of a works contract at a uniform rate. In spite of this, the
KVAT Act which came into force on 01.05.2005 did not provide for a           B
uniform rate. The provision for uniform rate in respect of goods supplied
in execution of works contracts was inserted only w.e.f.01.04.2006 and
consequently it is only for the period from 01.04.2006 that a uniform rate
under the newly inserted Clause (c) of Section 4(1) became applicable.
      (vii) In so far as the declared goods under Section 14 of the CST      C
Act are concerned, both before and after 31.03.2006, the KVAT Act
makes it clear that the rate of tax, even when supplied in execution of a
works contract, will be the rate mentioned in Section 15 of the CST Act.
Under the KVAT Act as it stood upto 31.03.2006, this position prevailed
under Section 4(1)(a) read with Serial No.20 of the Third Schedule.
Under the KVAT Act as it stands after 01.04.2006, the said position has      D
been statutorily provided for in Section 4(1)(c) itself which has been
made “subject to Sections 14 and 15 of the Central Sales Tax Act, 1956”.
      (viii) The tax on sale or purchase of declared goods covered by
Sections 14 and 15 of the CST Act, even when such goods are supplied
in execution of a works contract covered by Article 366(29A)(b), shall       E
be subject to the restrictions and conditions mentioned in Section 15 of
the CST Act. This position of law has been specifically mandated in
Article 286(3)(b) of the Constitution. This position has also been
statutorily incorporated in the KVAT Act, both before and after
31.03.2006.                                                                  F
      (ix) A review of the VAT enactments of other States would
indicate that following the decision in Gannon Dunkerly& Co (supra),
some States opted to levy a uniform rate of tax on all goods supplied in
the execution of works contracts. Other states provided for different
applicable rates. Reference can be made by way of illustration to the        G
VAT Acts for Andhra Pradesh, Delhi, Odisha and Tamil Nadu.
         8. The rival submissions have to be analysed.

2
    (1976) 2 SCC 241
3
    (1990)1 SCC 532
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126            SUPREME COURT REPORTS                           [2018] 3 S.C.R.


A            9. To facilitate an analysis of the submissions which have been
      urged on behalf of the State in appeal, it would be necessary to advert to
      the provisions of the KVAT Act 2003 prior to 1 April 2006 bearing on the
      controversy. 1 April 2006 assumes significance because by Karnataka
      Act 4 of 2006, clause (c) was introduced into Section 4(1) so as to
      incorporate a specific rate of tax on the transfer of property involved in
B
      the execution of works contracts. The rate of tax came to be specified
      for works contracts of various descriptions in the Sixth Schedule. But
      even before 1 April 2006, as our analysis would indicate, there is no
      manner of doubt that works contracts were exigible to the levy of tax
      under the KVAT Act 2003.
C           10. Section 3 of the Act is the charging provision and provides as
      follows:
            “3. Levy of tax.- (1) The tax shall be levied on every sale of
            goods in the State by a registered dealer or a dealer liable to be
            registered, in accordance with the provisions of this Act.
D
            (2) The tax shall also be levied, and paid by every registered dealer
            or a dealer liable to be registered, on the sale of taxable goods to
            him, for use in the course of his business, by a person who is not
            registered under this Act.”

E            The charge of tax is on the sale of goods.The statutory meaning
      of the expression “sale” is contained in Section 3(29), in the following
      terms:
            “(29) ‘Sale’ with all its grammatical variation and cognate
            expressions means every transfer of the property in goods (other
F           than by way of a mortgage, hypothecation, charge or pledge) by
            one person to another in the course of trade or business for cash
            or for deferred payment or other valuable consideration and
            includes,-
            (a) a transfer otherwise than in pursuance of a contract of property
            in any goods for cash, deferred payment or other valuable
G
            consideration;
            (b) a transfer of property in goods (whether as goods or in
            some other form) involved in the execution of a works
            contract;
H
       STATE OF KARNATAKA AND ANR. v. M/S DURGA                                127
        PROJECTS INC [DR. D. Y. CHANDRACHUD, J. ]

      (c) a delivery of goods on hire purchase or any system of payment        A
      by installments;
       (d) a transfer of the right to use any goods for any purpose (whether
       or not for a specified period) for cash, deferred payment or other
       valuable consideration”.
                                                        (emphasis supplied)    B
       The expression ‘sale’ includes a transfer of property in goods
(whether as goods or in some other form) involved in the execution of a
works contract. The expression ‘goods’ is defined in Section 2(15) to
mean all kinds of movable property including materials, commodities
and articles as well as goods involved in the execution of a works contract:   C
      “(15) ‘Goods’ means all kinds of movable property (other than
      newspaper, actionable claims, stocks and shares and securities)
      and includes livestock, all materials, commodities and articles
      (including goods, as goods or in some other form) involved in the
      execution of a works contract or those goods to be used in the           D
      fitting out, improvement or repair of movable property, and all
      growing crops, grass or things attached to, or forming part of the
      land which are agreed to be severed before sale or under the
      contract of sale.”
                                                      (emphasis supplied)      E
      Prior to the introduction of Section 4(1)(c) on 1 April 2006, Section
4 stood in the following terms:
      “4. Liability to tax and rates thereof.- (1) Every dealer who is or
      is required to be registered as specified in Sections 22 and 24,
      shall be liable to pay tax, on his taxable turnover,                     F
      (a) in respect of goods mentioned in,-
      (i) Second Schedule, at the rate of one per cent,
      (ii) Third Schedule, at the rate of four per cent, and
      (iii) Fourth Schedule, at the rate of twenty per cent.                   G

      (b) in respect of other goods, at the rate of twelve and one half
      per cent.”


                                                                               H
128             SUPREME COURT REPORTS                              [2018] 3 S.C.R.


A            By Karnataka Act 4 of 2006, clause (c) was introduced into Section
      4(1). Clause (c) reads thus:

             “(c) in respect of transfer of property in goods (whether as goods
             or in some other form) involved in the execution of works contract
             specified in column (2) of the Sixth Schedule, subject to Sections
B            14 and 15 of the Central Sales Tax Act, 1956 (Central Act 74 of
             1956), at the rates specified in the corresponding entries in column
             (3) of the said Schedule.”

            Section 4 sets out the liability of every dealer to pay tax on his
      taxable turnover. The expression ‘taxable turnover’ is defined in Section
C
      2(34) which reads thus :

             “(34) ‘Taxable turnover’ means the turnover on which a dealer
             shall be liable to pay tax as determined after making such deductions
             from his total turnover and in such manner as may be prescribed,
D            but shall not include the turnover of purchase or sale in the course
             of interstate trade or commerce or in the course of export of the
             goods out of the territory of India or in the course of import of the
             goods into the territory of India and the value of goods transferred
             or despatched outside the State otherwise than by way of sale.”

E            Taxable turnover comprises of the turnover on which a dealer
      shall be liable to pay tax. Taxable turnover is arrived at by making
      deductions from the total turnover in such a manner as may be prescribed
      by the rules made under the Act. The definition of ‘taxable turnover’ is
      linked to the definition of total turnover because it is from the total turnover
      that the prescribed deductions are made. Section 2(35) defines ‘total
F
      turnover’:

             “(35) ‘Total turnover’ means the aggregate turnover in all goods
             of a dealer at all places of business in the State, whether or not
             the whole or any portion of such turnover is liable to tax, including
G            the turnover of purchase or sale in the course of interstate trade
             or commerce or in the course of export of the goods out of the
             territory of India or in the course of import of the goods into the
             territory of India and the value of goods transferred or despatched
             outside the State otherwise than by way of sale.”

H
         STATE OF KARNATAKA AND ANR. v. M/S DURGA                                 129
          PROJECTS INC [DR. D. Y. CHANDRACHUD, J. ]

        The expression ‘total turnover’ in Section 2(35) is defined to mean       A
the aggregate turnover of a dealer in all goods, at all places of business
in the State. Hence, the definition of total turnover is linked to turnover.The
latter expression is defined in Section 2(36) as follows:

         “(36) ‘Turnover’ means the aggregate amount for which goods
         are sold or distributed or delivered or otherwise disposed of in any     B
         of the ways referred to in clause (29) by a dealer, either directly
         or through another, on his own account or on account of others,
         whether for cash or for deferred payment or other valuable
         consideration, and includes the aggregate amount for which goods
         are purchased from a person not registered under the Act and the         C
         value of goods transferred or despatched outside the State
         otherwise than by way of sale, and subject to such conditions and
         restrictions as may be prescribed the amount for which goods are
         sold shall include any sums charged for anything done by the dealer
         in respect of the goods sold at the time of or before the delivery
         thereof.                                                                 D

         Explanation.- The value of the goods transferred or despatched
         outside the State otherwise than by way of sale, shall be the
         amount for which the goods are ordinarily sold by the dealer or
         the prevailing market price of such goods where the dealer does
         not ordinarily sell the goods.”                                          E

         Section 7 provides when the sale of goods is deemed to take
place:

         “7. Time of sale of goods.- (1) Notwithstanding anything contained
         in the Sale of Goods Act, 1930 (Central Act 3 of 1930), for the          F
         purpose of this Act, and subject to subsection

         (2), the sale of goods shall be deemed to have taken place at the
         time of transfer of title or possession or incorporation of the goods
         in the course of execution of any works contract whether or not
         there is receipt of payment: Provided that where a dealer issues a       G
         tax invoice in respect of such sale within fourteen days from the
         date of the sale, the sale shall be deemed to have taken place at
         the time the invoice is issued.”

                                                                                  H
130            SUPREME COURT REPORTS                           [2018] 3 S.C.R.


A            Hence, in the case of a works contract, the sale of goods takes
      placeat the time of the incorporation of the goods in the course of its
      execution.
             11. The rules framed under the KVAT Act 2003 – the KVAT
      Rules 2005 – provide for the determination of total turnover. In the case
B     of a normal sale, the total turnover is provided for in Rule 3(1)(b). The
      total turnover in the case of a works contact is defined in Rule 3(1)(c).
      Rule 3(1), insofar as is material, provided as follows:
                           “PART II
            TURNOVER REGISTRATION AND PAYMENT OF
C           SECURITY
                      Determination of total and taxable turnover
            (1) The total turnover of a dealer, for the purposes of the Act,
            shall be the aggregate of-
            (a) the total amount paid or payable by the dealer as the
D           consideration for the purchase of any of the goods in respect of
            which tax is leviable under sub-section (2) of section 3;
            (b) the total amount paid or payable to the dealer as the
            consideration for the sale, supply or distribution of any goods where
            such sale, supply or distribution has taken place inside the State,
E           whether by the dealer himself or through his agent;
            (c) the total amount paid or payable to the dealer as the
            consideration for transfer of property in goods (whether as goods
            or in some other form) involved in the execution of works contract
            including any amount paid as advance to the dealer as a part of
            such consideration;
F
            (d) the total amount paid or payable to the dealer as the
            consideration for transfer of the right to use any goods for any
            purpose (whether or not for specified period);
            (e) the total amount paid or payable to the dealer as the
            consideration in respect of goods delivered on hire-purchase or
G
            any system of payment by instalments;
            (f) the aggregate of the sale prices received and receivable by
            the dealer in respect of sale of any goods in the course of linter-
            State trade or commerce and export out of the territory of India
            and sale in the course of import into the territory of India; and
H
       STATE OF KARNATAKA AND ANR. v. M/S DURGA                                 131
        PROJECTS INC [DR. D. Y. CHANDRACHUD, J. ]

      (g) the value of all goods transferred or despatched outside the          A
      State otherwise than by way of sale.”
       12. Under Rule 3(2), the taxable turnover is computed by allowing
for certain deductions from the total turnover determined under Rule
3(1). Among the deductions to be made are those in respect of amounts
expended towards labourcharges and other charges not involving the              B
transfer of property in goods in connection with the execution of a works
contract. Clauses (l) and (m) of Rule 3(2) are as follows:
      “The taxable turnover shall be determined by allowing the following
      deductions from the total turnover:-
      …                                                                         C

      (l) All amounts actually expended towards labour charges and
      other like charges not involving any transfer of property in goods
      in connection with the execution of works contract including
      charges incurred for erection, installation, fixing, fitting out or
      commissioning of the goods used in the execution of a works               D
      contract;
      (m) Such amounts calculated at the rate specified in column (3)
      of the Table below towards labour charges and other like charges
      as incurred in the execution of a works contract when such charges
      are not ascertainable from the books of accounts maintained by a          E
      dealer.”
      The table below clause (m) specifies types of contracts and
alongside,labour and like charges as a percentage of the value of the
contract. The principle is that expenditure on account of labour charges
involved in the execution of works contracts is excluded from the total         F
turnover in order to arrive at the taxable turnover. The liability to pay tax
under Section 4 is on the taxable turnover.
       13. The dispute in the present case relates to 2005-06. The case
relates to the position of law in the State of Karnataka, as it stood until
31 March 2006. There can be no manner of doubt that even prior to 1             G
April 2006 works contracts were exigible to the levy of tax. The charging
section, Section 3, mandates that “the tax shall be levied on every sale of
goods”. The expression ‘sale’ in Section 2(29) means ‘every transfer
of the property in goods’ including ‘a transfer of property in goods
                                                                                H
132               SUPREME COURT REPORTS                            [2018] 3 S.C.R.


A     (whether as goods or in some other form) involved in the execution of
      works contract’. Similarly, the definition of the expression ‘goods’ in
      Section 2(15) contains a clear reference to “all kinds of movable property”
      and all materials, commodities and articles (including goods, as goods or
      in some other form) involved in the execution of works contracts. The
      chargeability of goods involved in the execution of works contracts both
B
      before and after 01.04.2006 is a matter which lies beyond any element
      of doubt. Such provisions in the state laws – including the State of
      Karnataka – followed upon the 46th Amendment to the Constitution by
      which the expression ‘tax on the sale or purchase of goods’ was
      incorporated in Clause 29A of Article 366 to include taxes on the transfer
C     of property in goods involved in the execution of works contracts.

             14. Section 4 imposes a liability to pay taxes upon every dealer on
      his taxable turnover. Besides imposing a liability, Section 4 prescribes
      the rate of tax. The rate of tax on goods mentioned in the Second, Third
      and Fourth Schedules was specified in sub-clauses (i), (ii) and (iii) of
D     Section 4(1)(a). The Second Schedule at the material time attracted a
      rate of 1%, the Third Schedule 4% andthe Fourth Schedule, 20%. On
      ‘other goods’ the rate of tax was 12.5% under Section 4(1)(b). The
      expression ‘other goods’ in Section 4(1)(b) evidently meansthose goods
      which are not governed by Section 4(1)(a). Where goods are specifically
E     covered by any of the entries of the Second, Third and Fourth Schedules,
      such goods would be covered by the specific entry relating to those
      goods. Recourse to the residualprovisions of Section 4(1)(b) wouldbe
      available only in respect of ‘other goods’, that is, goods which did not fall
      within the purview of Section 4(1)(a). The law on the construction of a
      residual entry has been crystalized in several judgments of this Court
F     and it would be appropriate to refer to one of them: HPL Chemicals
      Ltd. v CCE4. After adverting to the decisions in Dunlop India Ltd.
      (supra), and Bharat Forge and Press Industries Pvt. Ltd. (supra),
      this Court reiterated that “only such goods as cannot be brought under
      the various specific entries in the tariff should be attempted to be brought
G     under the residuary entry”. Applying this principle, where goods are
      specifically covered by clauses (i), (ii), or (iii) of Section 4(1)(a), recourse
      to the residual provisions of Section 4(1)(b) would not be available. To
      allow a residual provision to consume the specific would be to invert the
      intent of the legislature. The state wants us to do just that.
      4
H         (2006)5 SCC 208
       STATE OF KARNATAKA AND ANR. v. M/S DURGA                                  133
        PROJECTS INC [DR. D. Y. CHANDRACHUD, J. ]

        15. In Gannon Dunkerly& Co (supra), this Court held that it is           A
permissible for the State legislatures to prescribe a uniform rate of tax
for all goods involved in the execution of works contracts, even though
different rates of tax are prescribed for the sale of such goods. This
followed upon the insertion of Article 366(29A)(b). In the opinion of this
Court:
                                                                                 B
       “… it would be permissible for the State Legislature to tax all the
       goods involved in the execution of a works contract at a uniform
       rate which may be different from the rates applicable to individual
       goods because the goods which are involved in the execution of a
       works contract when incorporated in the works can be classified
       into a separate category for the purpose of imposing the tax and a        C
       uniform rate may be prescribed for sale of such goods”.
       The rationale underlying this principle is that goods involved in the
execution of a works contract can be classified into a separate category,
so as to provide for a uniform rate of tax. The real issue before this
Court is as to whether prior to 1 April 2006, the State legislature of           D
Karnataka had in fact done so. The answer to this is in the negative, on
a plain and natural meaning of the words used.
       16. The core of the submissions which have been ably projected
before the Court by MrDevadattKamat is that the State legislature had
in fact prescribed a uniform rate for works contracts, prior to 1.4.2006         E
in Section 4(1)(b) under which a rate of 12.5% was provided. In his
submission, declared goods would be assessed separately; while the
balance of the goods in a works contract would be assessed on the total
turnover, which is incorporated under Rule 3(1)(c). We find ourselves
unable to accept the submission. In our view, it would be far-fetched to         F
accept that in enacting Section 4(1)(b), the legislature intended to prescribe
a uniform rate of tax, prior to 1.4.2006, for goods incorporated in a works
contract. The scheme legislated upon in Section 4(1) envisaged specific
rates of tax on goods falling within the Second, Third and Fourth
Schedules. What Section 4(1)(b) provided was a residual entry under
which a rate of 12.5% was provided ‘in respect of other goods’. The              G
expression ‘in respect of other goods’ meant goods other than those
falling in the Second, Third and Fourth Schedules. Declared goods
specified in Section 14 of the Central Sales Tax Act, 1956 were
comprehended in Serial No.20 of the Third Schedule to the KVAT Act
                                                                                 H
134             SUPREME COURT REPORTS                              [2018] 3 S.C.R.


A     2003 and attracted a rate of 4%, which applied to goods in that Schedule.
      As a result of the deeming definition of the expression sale, a transfer of
      property in goods involved in the execution of a works contract become
      exigible to tax. Exigibiliy to tax, it is settled law, is distinct from the rate
      of tax and the measure of the tax. In Gannon Dunkerly& Co, this
      court expressed the view that it is open to the states to provide a uniform
B
      rate of tax on goods transferred in the course of the execution of a
      works contract. The exigibility to tax is not (as it cannot be) dependent
      on the state prescribing a uniform rate of tax for goods involved in works
      contracts. That the KVAT Act 2003 did not provide a uniform rate of tax
      prior to 01.04.2006 on goods involved in the execution of works contract
C     also becomes apparent when we read the amendment which introduced
      Section 4(1)(c) by Act 4 of 2006. As a result of the amendment, the
      legislature provided that the rate of tax in respect of the transfer of
      property in goods involved in the execution of a works contract would
      be as provided in the Sixth Schedule. The Sixth Schedule elucidates
      works contracts of various descriptions and elucidates the associated
D
      rates of tax for each distinct category. For declared goods, Section
      4(1)(c ) is expressly subject to Sections 14 and 15 of the CST Act 1956.
      Hence declared goods involved in the execution of a works contract are
      taxable at the rates mentioned in Section 15 of the CST Act while all
      other goods involved in the execution of a works contract are taxable at
E     the rate prescribed in the Sixth Schedule upon the amendment. The
      amendment introducing Section 4(1)(c) took effect on 1 April 2006. The
      amendment is not clarificatory. It was with effect from 1 April 2006
      that the State legislature mandated a uniform rate of tax on goods involved
      in the execution of works contracts as provided in the Sixth Schedule.
      The position as it existed upto 31 March 2006 was altered with effect
F
      from 1 April 2006. We are, therefore, unable to accept the submission
      of the State that upto 31 March 2006. Section 4(1)(b) envisaged a uniform
      rate for the transfer of goods involved in the execution of a works
      contract. Section 4 imposes the liability to pay tax on every dealer who
      is or is required to be registered, on his taxable turnover. The concept of
G     taxable turnover in Section 2(34) is defined with reference to the turnover
      on which a dealer is liable to be taxed, determined after making deductions
      from the total turnover as prescribed. The concept of taxable turnover
      thus incorporates the expressions ‘turnover’ and ‘total turnover’, both
      of which are defined in Sections 2(36) and Section 2(35) respectively.
H
       STATE OF KARNATAKA AND ANR. v. M/S DURGA                                135
        PROJECTS INC [DR. D. Y. CHANDRACHUD, J. ]

The manner in which the total turnover of a dealer is computed is              A
prescribed in Rule 3(1)(b), in the case of a normal sale, and in Rule
3(1)(c), for the purposes of a works contract. In the case of a works
contract, deductions are envisaged under sub-rule (2) of Rule 3, which
includes amounts such as labour and other charges. Section 7 provides
that the sale of goods shall be deemed to have taken place at the time of
                                                                               B
the transfer of title or possession or incorporation of the goods in the
course of the execution of a works contract. In our view, the interpretation
which we have placed on the provisions of the Act as they existed prior
to 1.4.2006 is consistent with the plain meaning of the words used by the
legislature. We are unable to subscribe to the submission which has
been urged on behalf the appellant that Section 4(1)(b), as it existed         C
prior to 1.4.2006 was a catch- all entry providing for a uniform rate of
tax on goods involved in the execution of a works contract. Such a
construction does not emerge from the plain meaning of the wordsused
and is in fact belied by the need which was felt by the legislature to
impose a uniform rate of tax only with effect from 1 April 2006.Before
                                                                               D
concluding, we need to clarify that the genesis of the present dispute
arises out of the proceedings which were initiated before AAR by the
respondent seeking guidance on the applicable rate of tax on the law as
it existed until 31.03.2006. This proceeding concludes the issue of
interpretation. We clarify, by way of abundant caution, that issues of a
factual nature, will fallfor adjudication in the course of assessment          E
proceedings. It was open to state legislatures to provide uniform rates of
tax on goods involved in the execution of works contracts. Many state
legislatures did so. The Karnataka legislature did so with effect from
1.4.2006, not earlier.
      17. For the above reasons, we find that there is no merit in the         F
challenge preferred by the State of Karnataka to the impugned judgment
and order of the High Court. The appeal shall, accordingly, stand
dismissed. There shall be no order as to costs.
      CIVIL APPEAL NOS.812-817 OF 2018:
      (Arising out of SLP(C )Nos 10570-10575 of 2015)                          G
      18. The High Court, by its impugned judgment and order dated 25
September 2014 dismissed the Sales Tax Revision Petitions filed under
Section 65(1) of the Karnataka Value Added Tax Act 2003 against the
order dated 26 August 2013 of the Karnataka Appellate Tribunal,
                                                                               H
136                SUPREME COURT REPORTS                      [2018] 3 S.C.R.


A     Bengaluru. While dismissing the revisions, the High Court relied upon its
      earlier decision dated 29 September 2012 in M/s Durga Projects Inc v
      State of Karnataka (STA 72 of 2010). The appeal filed by the State of
      Karnataka (Civil Appeal No.811 of 2018) in the matter of M/s Durga
      Projects Inc. has been dismissed by this Court. No separate submission
      has been raised in the present appeals. The appeals are, accordingly,
B
      dismissed. There shall be no order as to costs.


      Nidhi Jain                                               Appeals dismissed.


C




D




E




F




G




H