2016 (9) TMI 519 - SC - VAT and Sales Tax

Works contract - sub-contract - Is the assessee liable to turnover tax under Section 6-B of the Karnataka Sales Tax Act, 1957 on the payment made to the sub-contractor in spite of the fact that the sub-contractor had declared the turnover and paid taxes? - Held that - 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. 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. 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 - appeal allowed - decided against Revenue.

Issues Involved:
1. Liability of the assessee to turnover tax under Section 6-B of the Karnataka Sales Tax Act, 1957 on payments made to sub-contractors.
2. Inclusion of payments made to sub-contractors in the total turnover under Section 2(1)(u-2) of the Karnataka Sales Tax Act, 1957.

Issue-wise Detailed Analysis:

1. Liability of the assessee to turnover tax under Section 6-B of the Karnataka Sales Tax Act, 1957 on payments made to sub-contractors:

The primary issue in these appeals is whether the assessee, who is engaged in executing works contracts, is liable to pay turnover tax under Section 6-B of the Karnataka Sales Tax Act on payments made to sub-contractors. The assessee contended that since the sub-contractors had already declared their turnover and paid taxes, the value of the work entrusted to them should not be included in the assessee's total turnover for taxation purposes. This argument was based on the principle that there should be only one taxable event for the purpose of Article 366(29A)(b) of the Constitution of India. However, the Assessing Officer and the Karnataka Appellate Tribunal rejected this submission, and the High Court affirmed their view, leading to the dismissal of the assessee's revision petition.

In contrast, for the Assessment Year 1999-2000, the High Court held that the value of the work awarded to the sub-contractors could not be included in the total turnover of the assessee, resulting in a favorable judgment for the assessee. The Revenue appealed against this order.

2. Inclusion of payments made to sub-contractors in the total turnover under Section 2(1)(u-2) of the Karnataka Sales Tax Act, 1957:

The legal definitions of 'sale,' 'taxable turnover,' 'total turnover,' and 'turnover' under the Karnataka Act were crucial in resolving this issue. The court noted that 'total turnover' includes the aggregate turnover in all goods of a dealer, but certain deductions are permissible to arrive at the 'taxable turnover.' Section 5-B of the Karnataka Act imposes tax on the transfer of property in goods involved in the execution of works contracts, while Section 6-B levies turnover tax based on the total turnover.

The court had to determine if payments made to sub-contractors should be included in the total turnover for calculating turnover tax under Section 6-B. The assessee argued that including such payments would result in double taxation, as sub-contractors had already paid sales tax. The court found merit in the assessee's argument, referencing a similar case under the Andhra Pradesh Value Added Tax Act, where it was held that the value of work entrusted to sub-contractors should not be included in the main contractor's turnover.

The court emphasized that the Karnataka Sales Tax Rules, specifically Rule 6(1)(c), restrict the total turnover to the amount paid for the transfer of property in goods involved in the execution of works contracts. Since the payments to sub-contractors were not for the transfer of property in goods, they should not be included in the total turnover.

Conclusion:

The court concluded that the value of the work entrusted to sub-contractors or payments made to them should not be included in the total turnover for the purposes of Section 6-B of the Karnataka Act. Consequently, the appeals filed by the assessee were allowed, and the appeal preferred by the Revenue was dismissed. There was no order as to costs.

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