Emphasizing that the property in goods passes through the theory of accretion in a works contract, the Supreme Court upheld the view taken by the Karnataka High Court that the payment made to the sub-contractors is required to be deducted for determining the taxable value for the purpose of calculating tax under Section 15(1) of the VAT Act. Additionally, the Court clarified that the deduction of payment made to the sub-contractor cannot be equated with input tax credit (ITC).
The Court referred to the Notification dated March 23, 2005, issued under Section 15(1) of the VAT Act, to explain that tax was payable by the dealer at the rate of 4% of the total consideration for the works contract executed by him. To the extent that the contract was executed through subcontractors, it cannot be said that the works contract was executed by the main contractor.
Hence, the total consideration for the works contract executed by the main contractor can be derived only if the payments made to the sub-contractors are reduced, the Court added while dismissing the appeal in favour of the taxpayer.
Essentially, the Court affirmed that the consideration for the execution of the works contract executed refers to consideration received by the principal contractor and does not include the consideration received and paid to the subcontractor. Also, under Section 15 of the Karnataka VAT Act, 2003, for the period up to March 01, 2006, the principal contractor is entitled to a deduction of payments made by subcontractors only if they are registered dealers and the said subcontractor has accounted for it and paid tax thereon.
A Two-Judge Bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan referred to the 46th Constitutional amendment to explain that the transfer of property in goods involved in the course of execution of a works contract was deemed to be a sale of goods under clause (b) of Article 366(29A) of the Constitution of India.
The Bench observed that while the State legislatures have the competence to impose sales tax on the works contracts after the 46th Constitutional Amendment, the principle that property in goods passes on the basis of the principle of accretion in a works contract remains unchanged. In fact, the passing of property through accretion is a fundamental feature of a works contract.
Briefly, in this case, the respondent, a registered dealer engaged in the business of executing works contracts, executed part of the work through its sub-contractors. Accordingly, it approached the Authority for Advance Ruling (AAR) seeking a determination of VAT liability on the payments made to the sub-contractors.
The AAR held that since there was no specific provision till March 31, 2006, in the VAT Act for providing a deduction of payment made to the subcontractors, no such deduction was admissible. Dissatisfied, the respondent approached the High Court, where it was held that the payment made by the main contractor to the sub-contractor was not liable to be included in the taxable consideration of the main contractor, as this would lead to double taxation.
Cases Relied On:
State of Madras vs. Gannon Dunkerley and Co. (Madras) Ltd. AIR 1958 SC 560
State of Andhra Pradesh vs. Larsen & Toubro & Others 2008 (17) VST Page 1
Case Distinguished:
State of Kerala & Anr. vs. Builders Association of India & Ors. (1997) 2 SCC 183
Appearances:
AAG Aman Panwar, for the Appellant/ Revenue
Advocate Chinmay Deshpande, for the Respondent/ Taxpayer
