Works contract resale tax on contractor payments to sub-contractor held inapplicable where goods pass at incorporation.

Resale tax on payments made by a contractor to a registered sub-contractor for works execution was considered in light of section 6B of the Karnataka Sales Tax Act and article 366(29A)(b). The provision was construed as applying to second or subsequent sales of goods, but in a works contract the transfer of property in goods occurs through the sub-contractor when the goods are incorporated into the works. On that basis, the contractor does not retain goods capable of a separate resale, so tax could not be levied on the contractor for amounts paid to the sub-contractor. The earlier contrary view was held inapplicable after the Supreme Court's works contract ruling.

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Issues: Whether resale tax under section 6B of the Karnataka Sales Tax Act, 1957 could be levied on amounts paid by the contractor to a registered sub-contractor for execution of works.

Analysis: Section 6B was introduced to tax second or subsequent sales of goods and had to be construed in that context. The relevant scheme, read with the constitutional concept of deemed sale in article 366(29A)(b), shows that when a contractor entrusts part of the work to a registered sub-contractor, the transfer of property in goods takes place only through the sub-contractor at the stage of incorporation in the works. The contractor does not thereafter retain goods capable of retransfer so as to create a separate resale. The earlier view treating the transaction as taxable in the hands of both contractor and sub-contractor was held not applicable in the light of the Supreme Court ruling on works contracts.

Conclusion: Resale tax under section 6B was not legally leviable on the contractor in respect of payments made to the sub-contractor, and the question was answered in favour of the assessee.

Ratio Decidendi: In a works contract, where a registered sub-contractor executes part of the work, the taxable transfer of property in goods is attributable to the sub-contractor at incorporation and does not amount to a resale by the contractor liable to tax under section 6B.

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