By TIOL News Service

NEW DELHI, SEPT 06, 2016 : THE assessee is doing the business of engineers and contractors and in this process it, inter alia, executes projects under contracts with public sector undertakings, local bodies as well as the Union and the State Governments, besides private sector. The contracts which are secured by the assessee are the works contracts and a part thereof is generally assigned to sub-contractors. These sub-contractors are registered with Commercial Taxes, and accordingly submitted returns and paid taxes for the execution of the works contract.

Likewise, returns are filed by the assessee as well on regular basis. In the course of the assessment, the assessee submitted that the sub-contractors were the parties who executed the works contract and since the transfer of property involved in such execution had already been taxed, the appellant cannot be taxed again under Section 6-B of the Karnataka VAT Act there being only one taxable event for the purpose of Article 366(29 A)( b) of the Constitution of India. In nutshell, it was the submission of the assessee that value of the work entrusted to the sub-contractor could not be taken into account while computing total turnover of the assessee for the purpose of taxation under the Karnataka Act. This submission of the assessee was, however, negatived by the Assessing Officer as well as the Karnataka Appellate Tribunal and in some cases by the High Court.

In the case of this very assessee, the same question of law had arisen, albeit in the context of Andhra Pradesh Value Added Tax Act, 2005. The Supreme Court has decided the issue in its judgment known as State of Andhra Pradesh & Ors. v. Larsen & Toubro Limited & Ors. - 2008-TIOL-158-SC-VAT ('Andhra Pradesh judgment'). The question of law is answered in favour of the assessee.

The Supreme Court observed,

'Sale' is defined as transfer of the property in goods by one person to another in the course of trade or business for consideration and it, inter alia, includes a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. Thus, even in respect of works contract whenever there is a transfer of property in goods, that is deemed as 'sale'.

An essential element to constitute a transaction as 'sale' is the transfer of property in goods. Aggregate amount for which the goods are bought or sold, or supplied or distributed or delivered or otherwise disposed of, by a dealer is treated as 'turnover' within the meaning of Section 2(v) of the Karnataka Act. There are two variants of this turnover known as 'taxable turnover' and 'total turnover'. 'Total turnover' is defined as aggregate turnover in all goods of a dealer at all places of business in the State. However, from this aggregate turnover, certain deductions are permissible under the provisions of the Karnataka Act and when those deductions are allowed from the total turnover, we get 'taxable turnover' on which a dealer is liable to pay tax.

On a plain reading of Sections 5-B and 6-B of the Karnataka Act, it can be seen that Section 5-B deals with levy of tax on transfer of property in goods involved in the execution of the works contract. It is, thus, a special provision made for imposing sales tax on works contract and tax is payable on 'taxable turnover of transfer of property in goods'.

The question for determination by the Supreme Court in this case is: for calculating the turnover for the purpose of payment of turnover tax under Section 6-B of the Karnataka Act, whether payments made to sub-contractor are to be included while calculating the total turnover?

The Supreme Court found that the position taken by the assessee has to prevail, which appears to be meritorious. This result follows even from the bare perusal of the Karnataka Act and Rules.

The Supreme Court observed,

‘Transfer of property in goods, becomes necessary event and unless there is a transfer of property, the amount paid is not to be included in the total turnover. The amount paid to the sub-contractor is not for transfer of property in goods. When matter is examined from this angle, the ratio laid down by this Court in the Andhra Pradesh judgment clearly applies inasmuch as in that case also the Court noticed that Section 4(7) of the Andhra Pradesh Act indicated that the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works. The Court held that the value of the goods which constitute the measure for the levy of tax is the value of goods at the time of the incorporation of the goods in the works. The Court further found that same was the position contained in Rule 17(1)(a) of the Andhra Pradesh Value Added Tax Rules, 2005.

It is not in dispute that the facts and the issue involved were identical, i.e. the assessee had assigned parts of the construction work to sub- contractors who were registered dealers. These sub-contractors had purchased goods and chattels like bricks, cement and steel and, where necessary, supply and erect equipments such as lifts, hoists, etc. The materials were brought to the site and they remain the property of the sub- contractor. The site was occupied by the sub-contractor and the materials were erected by the sub-contractor. In this backdrop, after taking note of some provisions of the Andhra Pradesh Act, the Court explained the legal position in the following manner:

"16. By virtue of Article 366(29- A)( b) of the Constitution, once the work is assigned by the contractor (L&T), the only transfer of property in goods is by the sub-contractor(s) who is a registered dealer in this case and who claims to have paid taxes under the Act on the goods involved in the execution of the works. Once the work is assigned by L&T to its sub- contractor(s), L&T ceases to execute the works contract in the sense contemplated by Article 366(29- A)( b) because property passes by accretion and there is no property in goods with the contractor which is capable of a retransfer, whether as goods or in some other form.

17. The question which is raised before us is whether the turnover of the sub-contractors (whose names are also given in the original writ petition) is to be added to the turnover of L&T. In other words, the question which we are required to answer is whether the goods employed by the sub- contractors occur in the form of a single deemed sale or multiple deemed sales. In our view, the principle of law in this regard is clarified by this Court in Builders' Assn. of India as under: (SCC p. 673, para 36)

"36 … Ordinarily unless there is a contract to the contrary in the case of a works contract, the property in the goods used in the construction of a building passes to the owner of the land on which the building is constructed, when the goods or materials used are incorporated in the building."

18. As stated above, according to the Department, there are two deemed sales, one from the main contractor to the contractee and the other from sub-contractor(s) to the main contractor, in the event of the contractee not having any privity of contract with the sub-contractor(s).

19. If one keeps in mind the abovequoted observation of this Court in Builders' Assn. of India the position becomes clear, namely, that even if there is no privity of contract between the contractee and the sub- contractor, that would not do away with the principle of transfer of property by the sub-contractor by employing the same on the property belonging to the contractee. This reasoning is based on the principle of accretion of property in goods. It is subject to the contract to the contrary. Thus, in our view, in such a case, the work executed by a sub- contractor, results in a single transaction and not as multiple transactions. This reasoning is also borne out by Section 4(7) which refers to the value of goods at the time of incorporation in the works executed. In our view, if the argument of the Department is to be accepted, it would result in plurality of deemed sales which would be contrary to Article 366(29- A)( b) of the Constitution as held by the impugned judgment of the High Court. Moreover, it may result in double taxation which may make the said 2005 Act vulnerable to challenge as violative of Articles 14, 19(1)(g) and 265 of the Constitution of India as held by the High Court in its impugned judgment."

This raison d'etre shall apply, in full force, while answering the question even in the context of the Karnataka Act."

Held: the value of the work entrusted to the sub- contractors or payments made to them shall not be taken into consideration while computing total turnover for the purposes of Section 6-B of the Karnataka Act.

(See 2016-TIOL-155-SC-VAT)