2008 (8) TMI 21 - SC - VAT / Sales Tax

Subcontractor turnover cannot be automatically added to main contractor; assessing officer must examine subcontracts and tax invoices first

State of Andhra Pradesh & Ors. Versus Larsen & Tourbo Ltd. & Ors.

SC held that in construction works contracts the subcontractor-who effects the transfer of property in goods and issues tax invoices-cannot have his ... AP VAT - construction work to the sub-contractors - concept of 'deemed sales' - addition of sub- contractor's turnover to the turnover of L&T - Whether the turnover of the sub- contractors is liable to be added to the turnover of L&T?​​​​​​​ - HELD THAT:- A contract of work, i.e., 'works contract' involves transfer of property and also element of service or work rendered. That is why it is called composite contract. Works contracts can be of two types (a) Works contracts for constructions; and (b) Works contract in relation to any movable property like repairs to vehicles, printing contracts etc. The tax charged in the tax invoice issued by the sub-contractor shall be accounted by him in his returns. Therefore, the scheme indicates that there is a 'deemed sale' by the dealer executing the work, i.e., the sub-contractor. It is only the sub- contractor who effects transfer of property in goods as no goods vests in the respondent company (contractor) so as to be the subject-matter of a retransfer. By virtue of Article 366 (29A)(b) of the Constitution once the work is assigned by the contractor (L&T), the only transfer of property in goods is by the sub-contractor(s) who is a registered dealer in this case and who claims to have paid taxes under the Act on the goods involved in the execution of the works. Once the work is assigned by L&T to its sub-contractor(s), L&T ceases to execute the works contract in the sense contemplated by Article 366(29A)(b) because property passes by accretion and there is no property in goods with the contractor which is capable of a retransfer, whether as goods or in some other form. It has been urged on behalf of the Department that the respondent company has not complied with the provisions of Rule 17(1)(c) as it stood at the relevant time, which require the sub-contractor(s) to issue tax invoice to the L&T which invoices would have indicated the value of the goods at the time of incorporation in such sub- contract and which would have indicated the tax charged. This point is seriously disputed. According to the respondent company it did produce all tax invoices received from the sub- contractors but the A.O. proceeded on the basis that there were two deemed sales, one from main contractor to contractee and the other from the sub-contractors to the main contractor and consequently the A.O. did not look into the tax invoices of the sub-contractor(s). In this connection, we may state that the A.O. decided the matter on principle. The respondent company has annexed a list to the original writ petition in which it has given all the details regarding works contract turnover including the value of the work done by the sub-contractor(s). We see no reason even on facts to interfere in the matter, however, in future we expect the A.O. to call for individual contract(s), tax invoice(s) and call such particulars require to be submitted by the assessee before adding the turnover of the sub-contractor to the turnover of the contractor. Accordingly, this civil appeal stands dismissed with no order as to costs. Issues Involved:1. Whether the turnover of sub-contractors should be included in the turnover of the main contractor (L&T) for tax purposes.2. Interpretation of Section 4(7)(a) of the Andhra Pradesh Value Added Tax Act, 2005.3. The concept of 'deemed sales' in the context of works contracts.4. Compliance with Rule 17(1)(c) of the Andhra Pradesh Value Added Tax Rules, 2005.5. The principle of transfer of property by the sub-contractor and its implications on tax liability.Issue-wise Detailed Analysis:1. Inclusion of Sub-Contractors' Turnover in Main Contractor's Turnover:The primary issue was whether the turnover of Rs.111,53,05,835/- of the sub-contractors should be added to the turnover of L&T. L&T argued that there was no provision under the Andhra Pradesh Value Added Tax Act, 2005 ('2005 Act') for including the sub-contractors' turnover in its returns. The Act's scheme did not contemplate the declaration of sub-contractors' turnover, and the sub-contractors were registered dealers who directly transferred property in goods to the contractee.2. Interpretation of Section 4(7)(a) of the Andhra Pradesh Value Added Tax Act, 2005:Section 4(7)(a) of the 2005 Act indicates that the taxable event is the transfer of property in goods involved in the execution of a works contract, which occurs when the goods are incorporated into the works. The value of the goods at the time of incorporation constitutes the measure for the levy of the tax. The Supreme Court emphasized that Section 4(7) is a self-contained code and that the transfer of property occurs at the time of incorporation of goods in the works executed.3. Concept of 'Deemed Sales' in Works Contracts:The Assessing Officer (A.O.) concluded that there were two deemed sales: one from the main contractor to the contractee and the other from the sub-contractors to the main contractor, due to the lack of privity of contract between the contractee and the sub-contractors. The Supreme Court, however, held that even without privity of contract, the principle of transfer of property by the sub-contractor to the contractee applies. This results in a single transaction rather than multiple transactions, aligning with the principle of accretion of property in goods.4. Compliance with Rule 17(1)(c) of the Andhra Pradesh Value Added Tax Rules, 2005:Rule 17(1)(c) requires sub-contractors to issue tax invoices to the main contractor for the value of goods at the time of incorporation in the sub-contract. The respondent company claimed to have produced all tax invoices from the sub-contractors, but the A.O. did not consider them, operating under the assumption of two deemed sales. The Supreme Court noted that the A.O. should have called for individual contracts, tax invoices, and other necessary particulars before adding the sub-contractors' turnover to the main contractor's turnover.5. Principle of Transfer of Property by Sub-Contractor:The Supreme Court held that once the work is assigned by the main contractor to the sub-contractor, the main contractor ceases to execute the works contract as contemplated by Article 366(29A)(b) of the Constitution. The property in goods passes by accretion, and there is no property in goods with the main contractor capable of retransfer. This principle prevents the addition of sub-contractors' turnover to the main contractor's turnover and avoids double taxation.Conclusion:The Supreme Court dismissed the civil appeal, upholding the High Court's judgment. It clarified that the property in goods passes to the contractee upon incorporation in the works executed, resulting in a single transaction. The Court also emphasized the need for the A.O. to properly verify individual contracts and tax invoices in future assessments. The judgment ensures that the turnover of sub-contractors, who are registered dealers, is not added to the turnover of the main contractor, thereby preventing double taxation and aligning with constitutional principles.