VAT - Works Contract - Who should pay VAT? Main Contractor - Sub Contractor or Both?
TEN years ago, the now famous Supreme Court Judge, Justice Chelameswar, as a judge of the AP High Court delivered a landmark judgement on the VAT payable by a main contractor or sub-contractor for a works contract -
There are three parties here.
1. Employer who has entrusted a works contract to the main contractor
2. Main Contractor
3. Sub-contractors, to whom the main contractor has entrusted the work.
The question before the High Court was, "who should pay VAT?" - the Contractor or the sub-contractor or both.
Whether in a transaction of entrustment of a works contract by the contractor to the sub-contractor, there is one taxable event under the VAT Act or two.
Revenue argued that there are two deemed sales - one from main contractor to contractee and the other from sub-contractor to the main contractor.
The High Court observed,
The sub-contractor is only an agent of the contractor and the property in goods passes directly from the sub-contractor to the employer and therefore there can only be one sale.
To hold that there are two taxable events in such a transaction, enabling the State to levy and collect tax both from the sub-contractor and the contractor would be violative of Article 14 also for the reason that wherever a contractor executes a works contract himself without employing the sub-contractor the deemed sale of goods involved in such execution of works contract would attract the tax only once and whenever the contractor employs a sub-contractor, the transfer of property in the same goods involved in the execution of such works contract attracts the tax twice over, which is plainly irrational and violative of Article 14 of the Constitution of India.
Two years later the Supreme Court upheld the AP High Court's judgement. We reported this case as
The issue is again before the Supreme Court, this time from the State of Karnataka on the Karnataka VAT.
The Supreme Court yesterday followed its earlier 2008 decision and held that the value of the work entrusted to the sub-contractors or payments made to them shall not be taken into consideration while computing total turnover for the purposes of Section 6-B of the Karnataka Act.
Is this decision of the Supreme Court applicable to Service Tax? A Larger Bench of the CESTAT reported as 2015-TIOL-768-CESTAT-BANG-LB followed the Supreme Court Judgement and held "where under an agreement (whether termed as a works contract, turnkey or EPC project contract), the principal contractor, in terms of the agreement with the employer/ contractee assigns the works to a sub-contractor and the transfer of property in goods involved in the execution of such contract passes from the sub contractor by accretion to or incorporation into the works, the principal contractor cannot be considered as having provided the taxable (works contract) service, enumerated and defined in Section 65 (105)(zzzza) of the Act."
Please also see 17 02 2015 and 30 04 2015
For more details on yesterday's judgement, please see Breaking News.