VAT : No Double Taxation for Works Contracts Involving Sub-Contractors

Supreme Court Upholds High Court Decision: No Double Taxation for Works Contracts Involving Sub-Contractors, Payments to Registered Sub-Contractors Not to be Included in Principal Contractor's Taxable Turnover

In a landmark decision, the Supreme Court of India has upheld the Karnataka High Court's judgment allowing principal contractors to exclude payments made to registered sub-contractors from their taxable turnover under the Karnataka Value Added Tax Act, 2003. The ruling, delivered by Justices J.B. Pardiwala and K.V. Viswanathan, effectively prevents double taxation in works contracts where parts of the work are subcontracted.

The case arose from an appeal filed by the Authority for Clarification and Advance Rulings, Gandhinagar Karnataka, challenging the High Court's decision in favor of M/s Skyline Construction and Housing Pvt. Ltd., a registered dealer engaged in executing works contracts. The main issue was whether payments made by principal contractors to sub-contractors should be included in the taxable turnover of the principal contractor.

The High Court had earlier ruled that for the period prior to March 1, 2006, principal contractors were entitled to deduct payments made to registered sub-contractors from the total consideration for determining tax liability, provided the sub-contractors accounted for such payments and paid the applicable tax. The Supreme Court's decision confirms this position, emphasizing that including such payments in the principal contractor's taxable turnover would lead to impermissible double taxation.

The judgment delves into the principle of accretion in works contracts, explaining that property in goods passes directly from the sub-contractor to the contractee, even without a direct contractual relationship between them. This principle was pivotal in determining the tax liability, as it clarified that deemed sales occur directly between sub-contractors and contractees.

The Supreme Court rejected the argument put forth by the state's counsel, who contended that the total turnover should include payments to sub-contractors. The Court reiterated that such inclusion would result in multiple deemed sales, contrary to the constitutional provisions and established legal principles, potentially leading to constitutional challenges based on double taxation.

The decision provides clarity on the interpretation of Section 15 of the Karnataka Value Added Tax Act, 2003, and reinforces the legal position that payments to registered sub-contractors should not be part of the principal contractor’s taxable consideration, provided the sub-contractors fulfill their tax obligations.

This ruling is expected to have significant implications for the construction industry and other sectors involving works contracts, ensuring fair taxation practices and preventing undue financial burdens on principal contractors.

Bottom Line:

In works contracts, payment made by a principal contractor to registered sub-contractors is not to be included in the taxable consideration of the principal contractor, provided such sub-contractors account for the payment and pay the applicable tax thereon.

Statutory provision(s): Karnataka Value Added Tax Act, 2003 - Section 15, Article 366(29A)(b) of the Constitution of India

Authority For Clarification And Advance Rulings, Gandhinagar Karnataka v. M/s Skyline Construction And Housing Pvt. Ltd., (SC) : Law Finder Doc Id # 2794831