Purchase tax on works-contract inputs and statutory labour deductions under Karnataka VAT when goods come from unregistered suppliers.

Tax under section 3(2) of the Karnataka Value Added Tax Act, 2003 applies where taxable goods are purchased from unregistered persons and used in execution of a works contract, even if the goods are absorbed in the finished work rather than resold in the same form. The liability arises when the unregistered suppliers have not collected tax and no input tax has been paid, and set-off cannot rest on mere book adjustment. Statutory labour deductions remain available in works contracts: actual labour charges may be deducted, and where not ascertainable, the prescribed 30 per cent deduction applies for civil works. Amounts attributable to non-sale activities such as stone cutting and landscaping must be excluded to the extent proved.

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Issues: (i) Whether tax was payable under section 3(2) of the Karnataka Value Added Tax Act, 2003 on payments made by the assessee to unregistered sub-contractors for goods used in execution of the works contract; (ii) Whether the assessee was entitled to deduction for labour charges, including the standard 30 per cent deduction under the Karnataka Value Added Tax Rules, and exclusion of amounts relatable to non-sale activities such as stone cutting and landscaping.

Issue (i): Whether tax was payable under section 3(2) of the Karnataka Value Added Tax Act, 2003 on payments made by the assessee to unregistered sub-contractors for goods used in execution of the works contract.

Analysis: Section 3(2) applies where taxable goods are sold to a registered dealer by a person not registered under the Act for use in the course of business. The charging provision is not confined to a resale transaction in the same form. Where goods purchased from unregistered dealers are absorbed in the execution of a works contract and form part of the final product, the liability under section 3(2) arises. Since the unregistered sub-contractors did not collect tax and the assessee had not paid input tax, the purchase tax liability was attracted. Any set-off against output tax could arise only after payment of the input tax in accordance with law, and not by mere book adjustment.

Conclusion: Tax was payable under section 3(2) of the Karnataka Value Added Tax Act, 2003, and this contention was rejected.

Issue (ii): Whether the assessee was entitled to deduction for labour charges, including the standard 30 per cent deduction under the Karnataka Value Added Tax Rules, and exclusion of amounts relatable to non-sale activities such as stone cutting and landscaping.

Analysis: Rule 3 permits deduction of actual labour charges, and where such charges are not ascertainable from the books, the prescribed standard deduction applies for civil works. In a works contract executed through sub-contractors, the assessee is not denied the statutory labour deduction merely because the work was entrusted to unregistered sub-contractors. The authority was also required to examine evidence relating to portions of the payment attributable to activities that did not involve sale of goods, such as stone cutting and landscaping, and exclude such amounts to the extent proved.

Conclusion: The assessee was entitled to the 30 per cent labour deduction, and the matter of exclusion of non-sale components was remitted for reconsideration by the audit officer.

Final Conclusion: The assessment was sustained on liability to purchase tax under section 3(2), but the denial of labour deduction was set aside and the matter was partly remitted for fresh examination of specific expenditure components.

Ratio Decidendi: Where a registered dealer purchases taxable goods from unregistered persons for use in execution of a works contract, section 3(2) is attracted, and statutory deductions for labour under the turnover rules remain available on proper proof or, in their absence, on the prescribed basis.

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