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.

AI Summary

Principal Contractor Faces Tax Challenge on Profit from Subcontracted Road Work and Own Materials Purchase Under Section 44. A principal contractor engaged in a works contract for road construction subcontracted parts of the project but had to complete it using his own materials after a subcontractor abandoned the work. The tax authority challenged the classification of this arrangement as a back-to-back works contract, proposing to tax the profit from the entire project, including the principal contractor's own material purchases. The issue is whether the principal contractor should be taxed on the profit from subcontracted work and his materials, given that the profit exceeds the value of the materials he purchased. An expert opinion is sought for clarification.