2009 (11) TMI 874 - HC - VAT and Sales Tax

Whether the activity of works contract up to March 31 2006 is exigible to the KVAT Act 2003? Held that - Once the work is assigned by the contractor to its subcontractor the contractor ceases to execute the work because the property passes by accretion and there is no property in goods left with the contractor which is capable of retransfer either as goods or in any other form. Thus the transfer of property is from sub-contractor to the contracting party that is contractee namely the recipient. Hence the work executed by the subcontractor results in single transaction and not as multiple transaction. Hence it would be erroneous to hold that the payments made by the contractor to the sub-contractor would require to be brought within the total turnover of the appellant or contractor and if such an interpretation is to be given it would lead to double taxation and hence the consideration for execution of works contract executed refers to consideration received by the principal contractor and does not include the consideration received and paid to sub-contractor. Under section 15 of the KVAT Act 2003 for the period up to March 1 2006 the principal contractor is entitled for deduction of payment made by subcontractors only if they are registered dealers and the said sub-contractor has accounted for it and paid tax thereon. In favour of the assessee

Summary

Issues Involved:
1. Whether the consideration for execution of works contract executed by the principal contractor includes the consideration received and paid to subcontractors.
2. Whether the principal contractor is entitled to a deduction of payments made to subcontractors who are registered dealers for the period prior to March 1, 2006.

Detailed Analysis:

Issue 1: Inclusion of Subcontractor's Consideration in Principal Contractor's Turnover
The appellant, a registered dealer under the Karnataka Value Added Tax Act, 2003 (KVAT Act), engaged in the execution of works contracts for residential apartments, sought an advance ruling on whether the works entrusted to subcontractors would be included in their total turnover. The Authority for Clarification and Advance Rulings initially held that:
- Up to March 31, 2006, the activity of the works contract is exigible to tax at the rate applicable to goods involved in the transfer of property under the KVAT Act.
- Payments made to subcontractors are not eligible for deduction up to March 31, 2006.
- Subcontractor turnover is eligible for deduction from April 1, 2006, by virtue of a notification dated May 27, 2006.

The appellant contended that the works executed by subcontractors should not be treated as consideration received by the appellant, as it would lead to double taxation. The appellant argued that there is only one deemed sale involving the transfer of property in goods, and the parts of the work executed by subcontractors should not be included in the principal contractor's turnover.

The court referred to the Supreme Court's decision in the case of State of Andhra Pradesh v. Larsen & Toubro Ltd., which clarified that the transfer of property in goods occurs when the goods are incorporated into the works. The subcontractor, being a registered dealer, issues a tax invoice for the value of the goods at the time of incorporation, and the tax charged is accounted for in their returns.

The court concluded that the consideration for execution of works contract executed by the principal contractor does not include the consideration received and paid to subcontractors. Including such payments in the principal contractor's turnover would lead to double taxation.

Issue 2: Deduction of Payments Made to Subcontractors
The appellant also sought clarification on whether they were entitled to a deduction of payments made to subcontractors who are registered dealers for the period prior to March 1, 2006. The court noted that the Karnataka Value Added Tax Act, 2003, was amended by Act No. 4 of 2006, which allowed for such deductions.

The court held that under section 15 of the KVAT Act, 2003, for the period up to March 1, 2006, the principal contractor is entitled to a deduction of payments made to subcontractors only if the subcontractors are registered dealers and have accounted for and paid tax on the amounts received.

The court directed the assessing officer to examine the appellant's claim by seeking necessary particulars to ascertain whether the work involved in the subcontract has resulted in tax yielding. If the appellant or subcontractors cannot demonstrate that the works contract entrusted to the subcontractor has been levied with tax, the authorities may add the same to the turnover of the contractor to avoid double taxation.

Order:
1. The order dated July 29, 2006, passed by the Authority for Clarification and Advance Rulings is set aside, and the appeal is allowed.
2. The substantial questions of law are answered in favor of the assessee and against the Revenue.
3. No costs.