2015 (4) TMI 570 - HC - VAT and Sales Tax

Levy of value added tax (VAT) from main contractor where as works contract was executed by the Sub contractor - demand of tax on the amount retained as profit by the main contractor - Refund claim of tax already paid - Held that - When the petitioner had sub contracted the entire work and also obtained the Form 20H certificate from the sub contractor who undertook to discharge the tax liability in respect of the entire work that was sub contracted, the amounts retained by the petitioner, from out of payments made by the awarder of the contract, represented only the profit element that accrued to the petitioner in his capacity as the main contractor. - In fact the very demand against the petitioner is only on the amount of ₹ 45,92,762.90 that was retained by him towards profit under the transaction with the awarder of the contract. In that view of the matter, there was no liability on the petitioner in terms of the Kerala Value Added Tax Act since there was no sale of material in the course of execution of works contract that emanated from the petitioner to the awarder of the contract. In the absence of any taxable event under the Kerala Value Added Tax Act, the respondent could not have demanded tax on the amounts retained by the petitioner as profits arising out of the transaction in question - Decided in favour of assessee.

Issues:
1. Interpretation of Kerala Value Added Tax Rules regarding liability certificate.
2. Tax liability on profit retained by contractor.
3. Applicability of Circular No.5/2006 on tax payment.
4. Legal implications of sub-contracting in works contract.
5. Validity of demand for tax on profit amount.

Analysis:
1. The petitioner, a works contractor, sub-contracted an entire work to a sub-contractor and sought a liability certificate for tax purposes. The petitioner claimed that the profit amount retained did not attract tax liability but paid the tax to obtain the certificate. The respondent demanded tax on the profit amount, leading to a legal dispute regarding the interpretation of the tax rules and the issuance of Form 20B certificate.

2. The respondent argued that the profit amount retained by the petitioner was not a permissible deduction under the Kerala Value Added Tax Act, citing Rule 10(2)(a). Additionally, Circular No.5/2006 was invoked to assert tax liability on profits derived from contracts. The court examined these contentions to determine the tax liability on the profit retained by the contractor and the validity of the demand made by the respondent.

3. The court referred to a Supreme Court decision highlighting the transfer of property in works contracts involving sub-contracting. It emphasized that the tax liability arises from the sale of material in the course of execution of works contracts. In this case, as the sub-contractor undertook to discharge the tax liability for the sub-contracted work, the profit retained by the petitioner did not attract tax liability under the Kerala Value Added Tax Act.

4. Based on the legal principles established by the Supreme Court decision, the court concluded that there was no taxable event concerning the profit amount retained by the petitioner. The demand for tax on this amount was deemed illegal, and the court quashed the demands made by the respondent. The court directed the respondent to refund the tax amount to the petitioner or provide credit for future periods, in line with the judgment's findings.

5. Ultimately, the court disposed of the writ petition in favor of the petitioner, emphasizing the absence of tax liability on the profit amount retained by the contractor in the context of sub-contracted works contracts. The judgment clarified the legal position regarding tax obligations in such scenarios and provided relief to the petitioner by setting aside the unlawful tax demands.

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