2016 (4) TMI 610 - HC - VAT and Sales Tax

Constitutionality of Rule 3(2)(i-1) of KVAT Rules - Taxability in the hands of whom - Whether consideration paid by the main contractor to the sub-contractors formed part of the subcontractors turnover liable to tax in the hands of subcontractors and does not form part of the contractors turnover - Engaged in execution of infrastructure projects involving work contracts which are got executed through sub-contractors - Appellant contended that Joint Commissioner of Commercial Taxes has not referred to the decision of the Apex Court at all. He has simply laid the entire emphasis on Rule 3(2)(i-1) of KVAT Rules - Held that - The Joint Commissioner has ignored the principle of law enunciated in the judgment of the Apex Court in the case of STATE OF ANDHRA PRADESH & OTHERS Vs. LARSEN & TOURBO LIMITED AND OTHERS 2008 (8) TMI 21 - SUPREME COURT and has merely focused his attention on Rule 3(2) of KVAT Rules. Now that petitioner has produced several documents to show that the sub-contractor has indeed included the amount received by him from the petitioner in his returns filed and that the same has been reflected in the assessment orders later on passed, copy of which has been also produced, without going into the constitutional validity of Rule 3(2)(i-1) of KVAT Rules, the matter is remanded to the Joint Commissioner of Commercial Taxes for fresh consideration in accordance with law keeping in mind the principle of law enunciated in the case of LARSEN & TOURBO LIMITED AND OTHERS and also in the case of BUILDERS ASSOCIATION OF INDIA Vs. UNION OF INDIA 1989 (3) TMI 356 - SUPREME COURT OF INDIA and the purpose and object behind Rule 3(2)(i-1) of KVAT Rules. - Decided partly in favour of petitioner

Issues Involved:
1. Challenge to the order passed by the Joint Commissioner of Commercial Taxes.
2. Constitutional validity of the first proviso to Rule 3(2)(i-1) of the Karnataka Value Added Tax Rules, 2005.
3. Determination of taxable turnover and deductions related to sub-contractors.
4. Compliance with the principles laid down by the Supreme Court in relevant judgments.

Detailed Analysis:

1. Challenge to the Order Passed by the Joint Commissioner of Commercial Taxes:
The petitioner, a company involved in infrastructure projects, challenged the order dated 12.06.2015 by the Joint Commissioner of Commercial Taxes (Admin.), which set aside the reassessment order dated 28.06.2014. The reassessment had allowed deductions for payments made to sub-contractors M/s. Venkata Sai Constructions Private Limited and M/s. R.K. Infra & Engineering (India) Private Limited. The Joint Commissioner disallowed these deductions, stating that the sub-contractors had not filed returns declaring the turnovers, thus recalculating the net tax payable with penalty and interest.

2. Constitutional Validity of the First Proviso to Rule 3(2)(i-1) of the Karnataka Value Added Tax Rules, 2005:
The petitioner also challenged the constitutional validity of Rule 3(2)(i-1) of the KVAT Rules, which requires proof that the sub-contractor was a registered dealer and that the turnover was included in their returns. The petitioner argued that the consideration paid to sub-contractors should form part of the sub-contractors' turnover and not the main contractor's, citing the Supreme Court's judgment in STATE OF ANDHRA PRADESH & OTHERS Vs. LARSEN & TOURBO LIMITED AND OTHERS.

3. Determination of Taxable Turnover and Deductions Related to Sub-Contractors:
The reassessment order initially allowed deductions based on the returns filed by the sub-contractors. However, the Joint Commissioner noted that the Assessing Authority did not verify whether the sub-contractors declared the turnover in their returns. The petitioner later produced documents showing that the sub-contractors had indeed filed revised returns and included the amounts received.

4. Compliance with the Principles Laid Down by the Supreme Court:
The court emphasized the principles established by the Supreme Court in STATE OF ANDHRA PRADESH & OTHERS Vs. LARSEN & TOURBO LIMITED AND OTHERS and BUILDERS ASSOCIATION OF INDIA Vs. UNION OF INDIA. These principles state that the property in goods used in a works contract passes to the owner upon incorporation into the building, resulting in a single transaction. The Joint Commissioner failed to consider these principles and focused solely on Rule 3(2)(i-1) of the KVAT Rules.

Conclusion:
The court found that the Joint Commissioner ignored the Supreme Court's principles and the documents provided by the petitioner. It was held that the Joint Commissioner should re-examine the matter in light of the Apex Court's judgments and the purpose behind Rule 3(2)(i-1) of the KVAT Rules. The matter was remanded for fresh consideration, and the writ petitions were allowed in part. The court did not find it necessary to address the constitutional challenge to Rule 3(2)(i-1) at this stage.

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