Works contract profit retention is not taxable when the entire execution is sub-contracted and no taxable transfer occurs.

Where the entire works contract is sub-contracted, the transfer of materials in execution is treated as occurring directly between the sub-contractor and the contractee, so the main contractor's retained amount is only profit. In the absence of any sale or taxable transfer of goods by the main contractor to the awarder in the course of execution, no taxable event arises under the Kerala VAT regime on that retained profit element. The discussion reflects the governing principle that a demand cannot be sustained merely because the contractor kept the balance amount as profit, and the levy on that component was treated as illegal.

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Issues: Whether the amount retained by the main contractor as profit, after sub-contracting the entire works contract, was liable to tax under the Kerala Value Added Tax regime.

Analysis: Where the entire work under a works contract is sub-contracted, the transfer of materials in execution of the contract is treated as taking place directly from the sub-contractor to the contractee. On those facts, the amount retained by the main contractor represents only its profit element. In the absence of any sale of material in the course of execution of the works contract by the petitioner to the awarder, there is no taxable event attracting tax on the retained amount. The demand could not be sustained merely because the contractor received the balance amount as profit, and the impugned demand was contrary to the legal position recognised in the governing law and the Supreme Court authority relied upon.

Conclusion: The levy on the amount retained as profit was illegal, and the demand and consequential liability certificate were quashed to that extent. The petitioner was entitled to refund or credit of the tax collected.

Final Conclusion: The writ petition succeeded, with relief granted against the tax demand on the profit component retained by the main contractor after full sub-contracting of the works.

Ratio Decidendi: When the entire execution of a works contract is sub-contracted and the main contractor retains only the profit element, no taxable transfer of goods arises from the main contractor to the contractee for that retained amount.

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