BACK TO BACK WORKS CONTRACT.

[Sadanand Bulbule]

Sir,

Admittedly under works contract the profit element is not taxable under the provisions of the VAT Act. In other words, the liability of tax on the value of materials used in the execution of such works contract alone is liable to tax at the applicable rate. Legal position being so, in one case the principal contractor has given works contract of construction road on back to back basis to couple of sub-contractors. One such contractor abandons the works for some reasons. The principal contractor being under the obligation tp complete the project on time, he purchases the required materials on his own account in the course of interstate purchases, uses the same and completes the project as a whole.

Now the assessing authority refuses to treat such works contract as back to back and proposed not only to disallow the profit earned on the entire project but also proposes to levy tax on such profit amount.

The question is whether the principal contractor is liable to pay tax on the value of his own purchased goods for use in the abandoned works contract or also on the profit earned on the sub-contracted work? Interestingly in this case the total profit earned on the entire project is more than the value of own purchase of materials.

Kindly clarify this module of contract can be treated as back to back or not for the reason that the principal contracted has also used his own materials to a little extent?

I request the experts to participate and thorw sufficient light on the issue.

[Sadanand Bulbule]

It is throw instead of thorw.

AI Summary

Works contract VAT treatment: principal's supply of materials to complete abandoned subcontracting does not automatically attract tax on profit. Whether a principal contractor who completes a works contract after a subcontractor abandons it and who procures and uses some materials on his own account is liable to VAT on profit or loses back-to-back treatment. VAT liability is ordinarily limited to the value of materials used in the works; profit is not taxable. Supplying some materials to finish abandoned subcontracted work does not automatically create a separate taxable supply, and factual proof of contractual continuity and allocation of materials is required to preserve back-to-back treatment.