2017 (9) TMI 1733 - AAR - VAT and Sales Tax

Tax Liability on Entire Contract Value Upheld Under MVAT Act

In Re : Baoding Tianwei Baobian Electric Co. Ltd.

The applicant is held liable to pay tax on the entire value of the contract, subject to the discharge of liability by the sub-contractor as per the MVAT ... Liability of VAT - process of setting up the power station - Sub-contract - Applicant submits that the sub-contractors are registered dealers under the provisions of MVAT Act, 2002 and are discharging the applicable VAT on the aforesaid work carried out under the sub-contract. Since the VAT is discharged on the works contract by the sub-contractor, the Applicant does not charge VAT in its invoices raised on the customer for the same sub-contract work. Whether the Applicant would be liable to pay VAT on the invoice raised to its customer i.e. PGCIL for the work undertaken by sub-contractors on its behalf - The clarification is being sought especially in light of the decision of the Hon. Andhra Pradesh High Court in the case of Larsen & Toubro [2006 (10) TMI 377 - ANDHRA PRADESH HIGH COURT] as upheld by the Hon. Supreme Court in STATE OF ANDHRA PRADESH & ORS. VERSUS LARSEN & TOURBO LTD. & ORS. [2008 (8) TMI 21 - SUPREME COURT]? Held that:- The applicant would be liable to pay tax on the entire value of the contract, subject of course to discharge of liability by the sub-contractor to the extent of the amount forming part of the contract value in terms of section 45 of the MVAT Act, 2002 - As regards amount retained by the principal contractor, the same is also a part of the same transaction and is liable to tax subject to the deduction as provided in law. Prospective effect of order - Held that:- In the present case there is no ambiguity in the provision of Act. The total contract value is taxable in the works contract. The rule 58 is clearly laid dawn for the eligible deductions the principle contractor and subcontractor are held jointly and several responsible for tax liability. The rule 58 has taken due care to avoid double taxation as it provides the deduction of turnover related to subcontractor from total contract value. There is no scope, for any doubt arising out of the provisions. There is no ambiguity in language provided in the Sections and Rules - The applicant cannot prove existence of circumstances which warrant us to use the discretionary power. In fact use of such discretionary powers in the absence of compelling circumstances would be detrimental to legitimate government revenue and would wipe out the legitimate tax liability In these circumstances, we do not allow the use of prospective effect as a tool to protect or to wipe of legitimate tax liability - the pray for granting prospective effect to this order is hereby rejected. Ruling:- The applicant is liable to pay tax on the entire value of the contract, subject of course to discharge of liability by the sub-contractor to the extent of the amount forming part of the contract value in terms of section 45 of the MVAT Act, 2002 and rule 58 of MVAT Rules, 2005. Amount retained by the principal contractor is also a part of the same transaction and is liable to tax subject to the deduction as provided in law. The prayer for prospective effect is rejected. Issues Involved:1. Liability of the applicant to pay VAT on invoices raised to its customer for work undertaken by sub-contractors.2. Determination of whether the applicant is liable to pay VAT on works contracts undertaken by registered sub-contractors.3. Request for prospective effect of the ruling.Issue-wise Detailed Analysis:1. Liability of the Applicant to Pay VAT on Invoices Raised to Its Customer for Work Undertaken by Sub-contractors:The applicant, engaged in the business of supplying, designing, engineering, testing, installation, and commissioning of power reactors, entered into three separate contracts with PGCIL: Offshore Supply Contract, Onshore Supply Contract, and Onshore Service Contract. The applicant subcontracted the onshore service contract to various sub-contractors. The applicant argued that since VAT is discharged by the sub-contractors, they should not be liable to charge VAT on invoices raised to PGCIL for the same work. The applicant relied on the decision of the Hon. Supreme Court in the case of Larsen & Toubro Vs. State of Andhra Pradesh, which held that no tax shall be payable by the main contractor on the consideration pertaining to the work sub-contracted to a registered sub-contractor.2. Determination of Whether the Applicant is Liable to Pay VAT on Works Contracts Undertaken by Registered Sub-contractors:The Authority for Advance Ruling (AAR) referred to the decision of the Hon. Maharashtra Sales Tax Tribunal (MSTT) in the case of M/s. Zangas KPTL Consortium V. The State of Maharashtra, which established that the relationship between the principal contractor and the sub-contractor in a works contract is of principal and agent, not buyer and seller. Both principal and agent are liable to tax to the extent of the amount received. The entire contract value is taxable, subject to deductions specified under the law. The MSTT also addressed the issue in the case of M/s. IVRCL Assets & Holdings V. The State of Maharashtra, confirming that the amount retained by the principal contractor is part of the sale proceeds and liable to tax. The AAR concluded that the applicant is liable to pay tax on the entire value of the contract, subject to the discharge of liability by the sub-contractor as per section 45 of the MVAT Act, 2002.3. Request for Prospective Effect of the Ruling:The applicant requested that if the ruling determines liability for VAT, it should be applied prospectively. The AAR referred to Section 55(9) of the MVAT Act, 2002, which allows for prospective effect if circumstances warrant. The Hon. Bombay High Court in the case of Lalbaugcha Raja Sarwajanik Ganeshotsav Mandal laid down principles for granting prospective effect, emphasizing the discretionary nature of this power and the need for strong reasons to justify its use. The AAR found no ambiguity in the provisions of the MVAT Act and concluded that there were no compelling circumstances to warrant prospective effect. The request for prospective effect was therefore rejected.Conclusion:a) The applicant is liable to pay tax on the entire value of the contract, subject to the discharge of liability by the sub-contractor in terms of section 45 of the MVAT Act, 2002, and rule 58 of MVAT Rules, 2005.b) The amount retained by the principal contractor is part of the same transaction and is liable to tax, subject to deductions as provided in law.c) The prayer for prospective effect is rejected.