CA K. Jitendra Babu
1. It is very common in works contracts for the main contractor who got the work awarded in his name to off-load the work to sub-contractor(s). The sub-contractor procures the materials, installs the materials as per the contractual terms & conditions and transfer of property in the materials take place between the sub-contractor and contractee. There is no transfer of property in materials in the execution of works contracts, from the Main contractor to the contractee, since the materials were procured directly by the sub-contractor but not by the main contractor. Since there was no transfer of property in materials from the main contractor to the contractee, no liability towards VAT arises in hands of the main contractor. Sub-contractor is responsible for discharge of VAT liability on the goods procured by him and transferred to contractee in the execution of works contracts.
2. The legal position regarding non-applicability of VAT/Sales Tax on the main contractor, in case the entire work is sub-contracted has already been clarified by the Hon ‘ble Supreme Court in the case of State of Andhra Pradesh and Others Vs. Larsen & Toubro and Others [(2008) 17 VST 1 (sc). The Supreme Court held that property in goods gets transferred from sub-contractor to the contractee even though there is no privity of contract between them. There are no two deemed sales in the transactions – one between the main contractor and contractee and another between the main contractor and the sub-contractor. There is only one deemed sale between the sub-contractor and the contractee. Therefore, the turnover relating to sub-contract executed by the sub-contractor need not be included in the turnover of the main contractor.
3. VAT Acts of many of the States contain provisions to exclude the turnover of the sub-contractor from that of the main contractor, subject to procedural compliances which vary from State to State.
4. Even though the legal position is settled, the VAT authorities in some of the States that main contractor is responsible for discharge of VAT liability on the difference of consideration received by him, over and above the consideration paid by him to the sub-contractor towards the works off-loaded to them. For ex., if a contractor gets a work for Rs.50 Lakhs and off-loads the same to the sub-contractor for Rs.40 Lakhs. The sub-contractor pays VAT on his turnover of Rs.40 Lakhs (subject to deductions as permitted under the State VAT Acts). The main contractor is not liable for discharge of any VAT, as he is not engaged in transfer of property in goods in the execution of works contracts and consequently there is no taxable turnover in his hands. VAT authorities are of the view that tax is payable by the main contractor on the balance amount of Rs.10 Lakhs (i.e., balance between Rs.50 Lakhs received by the main contractor from the contractee and Rs.40 Lakhs paid by the main contractor to the sub-contractee), which is contrary to the judgement of the Hon ‘ble Supreme Court in the case of Larsen and Toubro cited supra.
5. The issue has been clarified in clear terms in the recent judgement of the Hon ‘ble High Court of Kerala in the case of M/s Surya Constructions Vs. Commercial Tax Officer (WC & LT) [2014-VIL-358-KER]. The court clarified that main contractor is not liable for payment of VAT on the amount retained by him, out of the payments made by the contractee, which represents profit of the main contractor in the transaction. The demand of tax on the profit retained by the main contractor is held as illegal and liable to be set aside. The Court held that there Is no liability on the main contractor since there was no sale of material in the course of execution of works contract from the main contractor to the contractee. Copy of the judgement is attached herewith for ready reference of learned readers and professionals.
6. In effect, the legal position that the main contractor is not liable for payment of VAT on the profit earned by him, in the process of sub-contract of the contract has been once again clarified by the judgement of the Hon ‘ble High Court of Kerala in the judgement cited supra. In the example mentioned in para 2 above, the main contractor is not liable for payment of VAT on the profit of Rs.10 Lakhs earned by him.
7. In this context, it is also not to miss track of the position relating to deduction of sub-contractors turnover in the State of Delhi. VAT authorities in the State of Delhi has denied deduction of sub-contractors turnover on the ground that there is no provision in the Delhi VAT Act to allow for deduction of sub-contractors turnover; sub-conractor has to raise tax invoices on the main contractor by discharging VAT liability thereon; Main contractor is required to raise tax invoice on the contractee for the entire amount of contract and remit VAT thereon after adjustment of ITC/set-off of the VAT paid by the sub-contractor. The matter has reached the Hon ‘ble High Court of Delhi, which has affirmed the assessment by the VAT department, by holding that there is no double taxation in the transaction, as ITC/set-off is allowed at every point in the VAT regime, in the case of M/s Larsen & Toubro Ltd. & Another Vs. Union of India & Others [2012-VIL-40-DEL]. The matter is pending before the Hon ‘ble Supreme Court of India.
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