VAT & WORKS CONTRACTS

- S. M. Kulkarni
Senior General Manager Corporate Sales Tax, Mahindra & Mahindra Ltd, Mumbai

1. What is indivisible Works Contract ?

( Difference between Normal Sale & Works Contract )

The works contracts are not normal sales. In the normal sale there is a transfer of property in definite
or ascertained goods. The goods remain same before and after the delivery of the goods. However, in
works contracts it does not happen. The goods before the delivery and after the execution of works
contracts are different, many times in different form also. For example, at the site of construction of a
building, before the Construction (works contract) commences, the goods like cement, steel, sand etc.
are lying but after the Construction a building (immovable goods) comes to an existence. This is the
difference between the ` Normal” sale and the “deemed sale” in the indivisible works contract .

The Supreme Court of India, in its various landmark judgments has confirmed in the following
wordings the difference between a normal sale (as defined under the sale of goods Act) and an
indivisible / composite works contract;

“In a contract of sale, the main object is the transfer of Property and delivery of the possession of
Chattel as a Chattel to the buyer, where it is not so, it is a contract of Works & Labour” (Hindustan
Aeronautics Ltd. 55-STC 314-SC).

“If the thing to be delivered has any individual existence before the delivery as the property of the
party who is to deliver it, then it is a sale. If the main object of the work undertaken is not the transfer
of a Chattel qua Chattel, the contract is one for work and labour” (Hindustan Shipyard – 119 STC 533-
SC).

“The activity is a sale or works contract depends upon the facts, the terms and conditions and the
intention of the parties” (Mekenzis Ltd.-165 STC-58 SC)

In normal practice, we can identify many indivisible/composite works contracts namely construction of
a Building, erection of Plant & Machinery, Processing jobs, Job works, Repair jobs, Electrical Fittings,
Annual maintenance Contracts (AMCs). Installation of Elevators, Air Conditioners, Repairs of Vehicles,
Re-trending of old tyres, Customized Printing Jobs, Electro Plating, electro-galvanizing, anodizing etc.
We would discuss later , the levy of Sales Tax/VAT on such activities which are indivisible works
contracts.

2. What is a Deemed Sale ?

Under the State Sales Tax Laws, before the 46 th Amendment to the Constitution of India, the Sales
Tax was applicable only on the sales covered under the sale of goods Act (Normal sale). The indivisible
works contracts were not covered under the State Sales tax Acts since works contracts were not
normal sales. The Supreme Court confirmed this legal status in its land mark judgment in the case of
Gammon & Dunkerely (9 STC 353). Due to this legal status, the states were denied the levy of Sales
Tax on the indivisible works contracts. Such contractors were outside the clutches of sales tax laws.

The then Finance Ministers of the States have requested the then Union Finance Minister to take
necessary legal steps so as to levy Sales Tax on indivisible works contracts.

Finally, the 46 th amendment to the Constitution of India has been made on 2 nd February, 1983 to
add a sub-article (29-4) as under,

“(b) a tax on the transfer of property in goods (whether a goods or in some other form) involved in the
execution of a works contract”.

After the said 46 th Amendment to the Constitution, the States were empowered to levy Sales Tax /
Works Contract Tax on such sales, called as “Deemed sales” involved in the execution of works
contract. Due to the said amendment, the concept of `Deemed Sale’ was introduced. The important
features of deemed sales are as under,

(a) It is not a normal sale as defined under sale of goods Act but a deemed sale of goods subject to
sales tax by the States.

(b) In the `deemed sales’ the states can levy Sales tax only on `the transfer of property in goods” . In
other words , the states can levy Sales Tax / VAT only on the `Material Value’ of the works contract
and not on the `labour portion’ of the works contract.

( c ) If in a contract there is no transfer of property in goods from the contractor to the contractee,
then No sales tax is applicable on such contracts, called as “ Pure Labour Jobs”.

(d) Under the deemed Sale , an artificial break up of indivisible works contract has to be made to
arrive at the `material’ value and the `labour’ value of the contract.

Therefore, after the 46 th Amendment to the Constitution of India, the States are empowered to levy
sales tax (now VAT) on such deemed sales but only on the `Material Value’ of the works contract. The
High Courts and the Supreme Court have suggested methods on “How to arrive at a material value
from the total Contract Price”. (Gannon Dunkerly’s SC Judgement 1993 ) (88 STC 204).

The Supreme Court has also allowed the States to come out with an alternative method to levy Sales
Tax on Works contract, if to arrive at material value is difficult. The states have come out with a
alternative method called as “Composition Tax” method to tax the indivisible works contract, which is a
non-legal /alternative method. The small percentage like 1%, 2%, 4%, 8% as Composition Tax is
levied but on the total contract price without any deduction which is available in the legal options
under the State Sales Tax / VAT Acts. After, the said amendment to the Constitution certain States a
namely Maharashtra & Delhi have come out with separate `Works Contract’ Acts. The other states
incorporated the separate provision to levy Sales Tax on the deemed sales in the works contracts.
Under the State Sales Tax Acts or separate Works Contract Acts, No contractor or contractee were
entitled to claim any set off of Sales Tax paid to their vendors. There was a double taxation in the
hands of Contractors in the Sales Tax Regime.

3. Post VAT Scenario – Levy of VAT on Indivisible Works Contracts (Deemed Sales)

The states have introduced the new value Added Tax (VAT) System from 1 st April 2005. The other
five States have also followed from 1st April, 2006 and the State of Tamil Nadu has introduced VAT
System from 1.1.2007. At present , only Uttar Pradesh and Pondicherry (U.T.) have not joined the VAT
States / UTs . They may join from 1 st April, 2007. Therefore, the VAT system is in force in most of the
States and the Union Territories in India.

All the VAT States have incorporated in their respective State VAT Acts, the provisions of `Works
Contracts’ for levying the Sales Tax /VAT on the deemed sales involved in the execution of works
contracts. There is no Works Contract Tax (WCT) now, it is a VAT on the Works Contract transactions
(Deemed Sales). The Advantage to the Contractors is that under the VAT system, the Contractors like
manufacturers can avail VAT set off / Credit of the VAT paid to the local vendors, which was not
available in the Pre-VAT Regime.

Please note that there is an Uniform Scheme of Taxation for levy of VAT on Works Contracts under all
the State VAT Acts. There is no separate or different taxation schemes in different States like in pre-
VAT period for works contracts . There is a uniformity under the works contract provisions in the Post
VAT Regime. This is a positive factor for Contractors under VAT Regime. In all the State VAT
provisions, there are three options available for the Contractors to levy VAT on deemed sales (Works
Contracts) and VAT is leviable on the `Material Value’ of the Contract. The said three options (Uniform
in all the VAT States) are as under,

A-1 – Actual Labour Deduction (Legal Option)

A-2 – Standard Labour Deduction (Legal Option)

B - Composition Tax (Non Legal or Alternative Option)

Under the legal options A-1 and A-2, the State Governments can levy VAT only on the `Material Value”
of the Contract and not on the `Labour Portion’ of the Contract. Please note that the States are
empowered to levy tax on “Material Value” and not on “Material Cost” in the works contract. For
example, VAT is applicable on `Cement Block Value’ and not on ` Cement Cost’. Similarly, VAT is
applicable on `Wooden Furniture Value ’ and not on `Timber/Wood Cost’ in the hands of the
Contractor.

I have explained below, the said three options available for the Contractor, executing indivisible Works
Contract under the State VAT Acts (Uniform Across the States). Except the Rates of Composition Tax,
the Rates of TDS deductions, Returns and Payment dates, most of the Major Provisions are Similar /
Uniform under the State VAT Acts;

Actual Labour Deduction Option

A-1 Option (Levy of VAT on Works Contracts in the hands of the Contractor)

Under the legal option A-1, the VAT is payable on the `Material Value’ of the Contract. The deductions
are available for arriving at the Material Value from the total contract price. Such deductions are
specified in the corresponding provisions of the state VAT Acts which are based on the guidelines given
by the Supreme Court in the case of Gannon Dunkerley (88 STC 204) or the Contractors can arrive at
the Material value / price of the Contract by adopting cost + value Addition method. In this method,
the Contractor adds to the `Material Cost’ which is determined by considering all the purchase bills of
the materials (imports, outside the State and within the State), the margin on such material cost plus
any incidental expenses attributed towards the material value. In other words, the Contractor
determines the Material Price after adding Material Cost and Margin to such cost .

The 4% or 12.5% VAT would be applicable on such Material Value /Price, depending upon the
classification of such materials (Steel 4%, others 12.5% VAT) in which the property passes to the
contractee . In this option A-1, the Contractor can avail full VAT set off / credit of the VAT paid to the
local vendors (Not on CST paid to the outside the State Vendors) provided he obtains corresponding
`Tax Invoices’ from his local vendors. Therefore, the cost of VAT is zero for the Contractors in this
legal option. Similarly, the Contractee /Customer also can avail the full benefit except on the
purchases covered under the Negative list under the State VAT Act on which No VAT set off/Credit is
available. Mostly the Civil Works , Construction jobs, errection of immovable property (Structures) are
covered in the Negative lists. On the other works contract purchases, the full VAT set off / Credit is
available to the contractee /customer. The T.D.S. (works contract) provisions are applicable to the
contractee in this option which are discussed later.

In nutshell, in the option A-1 (Legal), the Contractor gets full VAT set off / credit on the VAT paid on
the inputs and the Contractee also gets the credit, if it is not in the Negative list (Like processing Jobs,
Job works, Printing Jobs, Repair Jobs etc.) The Contractors are benefited under VAT System as the
Contractors can avail full set off / credit.

However, in this option the Contractor has to maintain proper books of accounts and the other records
to identify the material value of the Contract.

A-1 option is the Best option available since the Contractor levies VAT only on the `Actual Material
Value’ of the contract, even though it is litigation prone option. Many Contractors who execute big
indivisible works contracts, Turnkey Jobs opt for legal option A-1.

Option A-2 (Standard Labour Deduction)

(Legal) (levy of VAT in the hands of the Contractor)

Under the legal option A-2, the VAT is payable on the `Material Value’ of the Contract. The Material
value is calculated after deducting the `Labour Portion’ from the total contract value / Price.

However, in this option a table is available in the State VAT Act / Rules which shows `Standard Labour
portion’ attributed to the various works contracts. The Contractor has to deduct such `Standard Labour
portion’ shown in such tables from the total Contract price to arrive at the `Material value’. The
Contractor would charge 12.5% VAT, on such material value. Each State has provided the said
`Standard Labour’ table , under this option. (Like in Maharashtra for Civil Works it is 30%, for Plant &
Machinery 15% , for AMCs 40% and for others 25% (Residuary)) .

The advantage in this option compare to the A-1 option is that it is litigation free. The Sales Tax
Departments would allow the said ` labour portion deductions’ as the same are provided in the VAT
Rules itself. Also no identification record has to be maintained by the contractor for the materials used
in the contracts. However, the Contractor has to consider both the options A-1 and A2 in the case
where the Contractee/ Customer does not get the VAT set off / credit and then selecting the cheaper
option.

Like in A-1 option, in A-2 option also, the Contractor gets full credit / set off on the VAT paid on the
inputs and the Contractee also gets full set off of the VAT paid provided the said purchases are not in
the Negative list of VAT set off / credit. The TDS provisions are applicable to the contractee in this
option also which are discussed later.

Option-B -- Composition Tax (Alternative / Non legal option)

( Levy of VAT in the hands of the Contractor )

Option B is the “Composition Tax” option. This is a non legal alternative option, simplier option for
those Contractors who cannot maintain the proper Accounts, Record of the material and other portion
in their contracts. The contractee / customer prefers this option as small amount of Composition Tax
2% / 4% is payable to the Contractor instead of 12.5% VAT payable in legal options. A-1 and A-2 .
However , VAT credit/set off is not be available to them in this option ( in this option , VAT Credit is
available only in the state of Maharashtra ) .

Under the “Composition” option, the Contractor has to pay Composition Tax (VAT) on the total
Contract value / price, No deduction of labour is available in this option. Similarly, No VAT set off /
Credit is available on the purchases of inputs to the Contractors and the same is not available to the
Contractees also. (Except under Maharashtra VAT Act/Rules, partial VAT Credit is available to both
Contractor and Contractee in the Composition Tax option). The Rates of Composition Tax differ from
state to state. Generally it is 2% (for civil contracts) @ 4% for other Contracts. However, exception is
in Maharashtra State where the Rate of Composition Tax is 5% on Civil Contracts and 8% on other
Contracts. In Maharashtra, in this option , in excess over 4% Credit is available on the input purchases
for civil contracts (where composition Tax Rate is 5%) and 64% of the total credit available for other
Contracts ( where Composition Tax Rate is 8%). Thus , partial VAT Credit is available to the
Contractors in the Composition Tax option. However, full credit is available to the Contractee in this
option in Maharashtra provided such purchases are not included in the Negative list under MVAT Rules.

Therefore, except in Maharashtra, in all other states No VAT set off / credit is available to both the
Contractor and the Contractee in the Composition tax option. The TDS provisions of Works Contract
are applicable to Conctractee in this option which are discussed later.

In Short, in all the States only the said 3 options (A-1, A-2 and B) are available in the hands of the
Contractors for levy of VAT on the local works contract transactions in the VAT system. If no VAT set
off/Credit is available to the Contractee / Customer, then the Composition Tax option is the Cheapest
since the Rate of Composition Tax is lower than 12.5% VAT. Therefore , if the Contractee / Customer
can not avail the VAT set off / Credit in all the three options , then , the VAT / Composition Tax paid to
the contractor is the cost to such Contractee /Customer, hence in such cases the Contractor and
Contractee should select the Best option available after considering the Actual Figures in all the three
options.

The States have provided separate sections / Rules under the respective State VAT Acts for the works
contracts transactions which include said three options of levy of VAT , TDS , VAT Credits and Negative
lists .

4. General Negative list Items for Works Contracts under State VAT Act & Rules

(a) Purchases effected by way of works contract where the contract results into an immovable Property
.

(b) Purchases of Building material which are not resold but are used in the activity of Construction.
(Free issues)

(c) Purchases of works contracts made by the Contractee in Civil Contracts .

(d) Any purchases of Consumables or of goods treated as Capital Assets by the Contractor/dealer
where he is principally engaged in doing job work or labour work and is not engaged in the business of
manufacturing of goods for sale by him.

(Please refer to the specific provisions of works contracts under the relevant state VAT Acts for such
Negative lists)

5. Tax deducted at source (TDS) provisions of works contracts under the State VAT Act & Rules

In most of the State VAT Acts, the provisions of Tax deducted at source (TDS) are incorporated. The
logic behind the TDS (WC) provisions is that the Contractors are not organized in many cases and they
do not pay taxes on time , therefore in this provision the contractee / customer deducts the prescribed
% of TDS from the Contract Price and pays the same before the prescribed dates, directly, to the
respective State Government through the specified challan. The TDS is to be deducted by the specified
customers only as notified by the State Governments. Generally, the dealers registered under the
State VAT Acts, State and Central Governments, Corporations, Government Undertakings, Co-
operative Societies only have to deduct the said TDS (WC) and not by all the Customers. The
monetary limit of the turnover is prescribed between Contractor and Contractee for such deduction in
the hands of the Customer in most of the VAT Acts.

It is responsibility of the Contractee / Customer to deduct the prescribed % of TDS (As provided in the
relevant VAT Act & Rules) and pay the same to the State Government before the prescribed date,
otherwise interest / penalty is leviable on such Contractees / Customers.

However, as per the State VAT Act provisions, the Seller (Contractor) is liable to pay VAT, if No TDS is
made by the Contractee/Customer. The State Governments have prescribed different VAT Forms under
the provision of TDS (WC). In certain States, the Contractee has to obtain TANs (Tax deductible
Account Number) and file Annual Returns of TDS under the TDS provisions .

In Maharashtra, under MVAT Act, 4% TDS is applicable (instead of 2%) in the case where the
Contractor has not obtained the VAT TIN certificate (URD Contractor).

6. Provisions of Works Contract for Main and Sub-Contractor under the State VAT Laws.

The following two types of VAT levies are provided for the transactions of works contracts between the
Main contractor and the Sub-Contractor,

 In certain States, (like Maharashtra) Main and Sub Contractors are treated as single legal
Entity. Therefore, there is no VAT/TDS applicable between the transactions of the Main and
the Sub-Contractor . The VAT Forms are exchanged between the Main and the Sub
Contractors to declare that they have discharged VAT liability for their portions of the
Contracts. In such cases, the Main Contractor gets the deduction of the value of the work
executed by the Sub Contractor. The main and the Sub Contractor are jointly and severally
responsible for the compliance under the works contract provisions of the VAT Act .
 In certain states ( other than Maharashtra), the Main and the

Sub Contractors are treated as separate legal Entities, like separate two dealers under the VAT Act.
Therefore, in such provisions , Sub contractor charges applicable VAT/Composition Tax to the Main
Contractor, avails Credit of the VAT paid on the inputs and the Main contracts also charges
VAT/Composition Tax applicable to the Contractee/Customer and avails the Credit available to him
against the VAT paid to the Sub-Contractor. They are assessed / audited separately under the State
VAT Act provisions.

It is advisable that the Main Contractor and the Sub Contractor should discuss all the relevant VAT
provisions before opting for the specific method of levy of VAT / Composition Tax to avoid
complications at a later date.

7. VAT & Service Tax, both , Applicable on certain Works Contracts.

On certain Works Contracts both VAT (WC) & Service Tax are applicable on the Contract price since
there involves the transfer of property in goods (sale of goods / materials) subject to VAT levied by the
State Government and rendering of Taxable Service subject to Service Tax levied by the Central
Government. Thus, the both the state & the Central Governments levy VAT & Service tax on the same
taxable base i.e. Contract Price, respectively.

The Contracts /Taxable services where both VAT and Service Tax are applicable are shown as under ,

 Construction contracts, Civil Jobs

 Annual Maintenance Contracts (AMCs)
 Errection of Plant and Machinery etc.

Please note that in such Works Contracts / Taxable Services, the working for levy of VAT & Service Tax
is to be done, separately, as per the provisions of VAT & Service Tax. Only in the case where the
Contractor opts for A-1 legal option of actual labour deduction method, he can pay Service Tax on the
actual labour portion and VAT on actual Material value. Otherwise only A-2 (Standard deduction) and B
(Composition Tax) options are available under VAT and No deduction for levy of Service Tax for the
Contractor. The Abatements are available under the Service Tax law for specific Taxable Services
towards the value of material / goods involved in the same. Like 67% Abatement from the contract
value is available under the Construction Services .

 Concept & Levy of C.S.T. on Inter state Works Contracts

The Central Government amended the definition of ` Sale’ under the Central Sales Tax Act, 1956 from
11.5.2002. With the said amendment, the states are empowered to levy C.S.T. on the interstate works
contract. By the said amendment, the concept of `Interstate works contract’ was introduced in the
C.S.T. Act by inserting in the definition of `Sale’ , the words “Transfer of Property in goods involved in
execution of works contract” .

When the Contractor dispatches his goods from one State to another under a individuals works
contract, it is a interstate works contract. The sections 3,4,5 of the C.S.T. Act are applicable to such
deemed sales in the interstate works contract. Accordingly, the State of dispatch can collect the
Central Sales Tax on such deemed interstate sales . The Contractors may not be allowed the interstate
depot transfers in the cases of indivisible works contracts since such dispatches are made to the sites
of the contractee situated in other state and the same are earmarked for the specific contractee. The
Contractor would invoice to the Contractee from the state of dispatch and would charge CST as
applicable , with or without C/D Forms.

Recently, the CST Act was further amended to explain, the deductions available on the total contract
price to the Contractor to arrive at the material value. Please note that in interstate works contracts
also, the C.S.T. is payable only on the Material Value/Price’ of the Contract and not on the Labour’
portion of the Contract.

The examples of interstate works contract would be that of Contractor from Mumbai, dispatching goods
from his Mumbai plant to the site in Chennai (Tamil Nadu) under a indivisible works contract or A
Manufacture in Mumbai dispatching his own material to a processor in Surat and the processor returns
back the processed material back to the Mumbai Manufacturer. The Surat processor would charge 4%
CST against `C’ form on the material value of his invoice amount being a interstate works contract in
his hands .

Please note that when it is an interstate works contract, the Contractee would raise an invoice on the
Customer situated in other state with applicable rate of CST on the Material value of the contract, but
the Customer would not deduct any amount towards TDS since there is no provision of T.D.S. under
the CST Act. TDS is to be deducted only in the local works contracts where the Contractor has charged
VAT/Composition Tax.

In short, if the Contractor dispatches goods from his state to the State of the Contractee (Customer)
under an indivisible works contract, it is a interstate Works contract in the hands of such Contractor
subject to levy of CST which is collected by the state of dispatch . However, in the interstate works
contracts also , C.S.T. is payable only on the `Material Value’ of the Contract .

9. How the Contractee / Customer should look into the Works Contract purchases for Minimum cost.

Under the VAT System, the Contractee/Customer can avail the full VAT Credit/Set off of the VAT paid
to the Contractor through the tax Invoices, provided such purchases are not in the Negative list of set
off/VAT Credit.

However, in the cases where the Contractees / Customers do not get any VAT set off / Credit, they
should note the following points to reduce their VAT Cost,

(a) To decide the Best option of “Levy of VAT/Composition Tax” before the execution of the Works
Contract Commences.

(b) To insist the Contractor to buy maximum inputs from local vendors only and the VAT Credit thereof
should be passed on to the Contractee by reducing his sale price , accordingly .

( c ) In case of free issues supplied by the Contractee / Customer to the Contractor , if the price of the
contractor is `Net off’ the material value supplied by the Contarctee then there is no negative VAT
impact to the Contractee . Otherwise, there is VAT cost in the hands of the contractee with regards to
the VAT paid on the purchases made by the Contractee and given as free issues to the Contractor.

(d) Prescribed % of TDS payment to the government and timely issuance of TDS certificates to the
Contractors.

(e) To insist the Contractor to show the VAT applicable, separately on the invoice (Tax Invoice, in the
case if the Contractee can avail the credit)

(f) To add the clause in the agreement with the Contractor, “If any additional liability on Account of
VAT (WC) arises at a future date shall be borne by the Contractor”.
10. The summary of the Main Points with regard to provisions of levy of VAT/Composition Tax under
the State VAT Act & Rules.

 Deemed Sales (WC) are taxed under the provisions of the State VAT Act, there are no
separate Works Contract Acts.
 For local works contract transaction State VAT (WC) is applicable and for interstate works
contract transaction , the Central Sales Tax (C.S.T.) is applicable as covered under the CST
Act.
 No VAT/CST is applicable on the pure labour Jobs (No material of the Contractor / Job worker
is involved)
 Under the State VAT Acts, VAT is applicable on the `Material Value” of the Contracts only as
determined by the three options as discussed earlier and under the C.S.T.Act also CST is
applicable on the `Material Value’ only.
 In the contracts , `where both the sale of goods and rendering of Taxable service are
involved, both VAT & Service Tax is payable on the same contract price subject to the relevant
provisions under both the VAT & Service Tax Laws.
 Proper clauses of VAT/CST should be incorporated in the Agreements between the Contractor
and Contractee to avoid litigation.
 Under the VAT System both the Contractor and the Contractee can avail full VAT set off/Credit
subject to the Negative List.
 The Contractee should ask for the price reduction from the Contractor to pass on the `VAT
Benefit’ availed by the Contractor on his local purchases.

I am sure the Readers will get useful information in this article on “VAT & Works Contracts” and both
the Contractor and Contractee can plan their works contracts transactions in a better and cheaper way
in future.

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 SubContract

Back to Back Contract – Case Study

Works Contract subject is a maze of complexities. The judgments given by courts contradict in such a manner that the
dealer is perplexed.

Case: Mr. M is a main contractor. He receives contract from Mr. C (customer). Mr. M sub-contract the entire work to Mr. S,
the sub-contractor. Mr. M has a profit margin in this transaction. The question is whether Mr.M is transferring any property to
Mr.C and whether there is any tax liability on him?

Case Study: The case can be analysed with the background of Supreme Court and High Court decisionrendered on back to
back contract under different provisions of the Law.

The Hon’ble Supreme Court in the case of State of Andhra Pradesh & Ors Vs Larsen & Tourbo Limited & Ors AIT –
2008 – 301 - SC, held that, based on the principle of accretion, there is no multiple deemed sale. There is only one sale
happening from sub-contractor to the contractee.

In another case recently decided by the Hon’ble Karnataka High Court in the case of Larsen and Toubro limited Vs Addl.
Deputy Commissioner of Commercial Taxes and Another [2008] 16 VST 616 held that Contractor paying money for
execution of works by sub-contractor constitutes sale. In calculating the turnover the said amount has to be taken into
consideration as representing the turnover in the hands of the main contractor.

The author has made an effort to find out the difference of opinion taken by the Courts.

Andhra Pradesh & Ors Vs Larsen & Tourbo Larsen and Toubro limited Vs Addl. Deputy
Limited & Ors AIT – 2008 – 301 Commissioner of Commercial Taxes and
Another [2008] 16 VST 616

Judgement given by Hon’ble Supreme Court Judgement given by Hon’ble High Court of
Karnataka

Principle laid down: Principle laid down:

Based on the principle of accretion, there is only
one deemed sale from the sub-contractor to the
contractee. There cannot be two deemed sale
taking place from main contractor to the
contractee.
The definition of ‘Sale’ being an inclusive
definition takes within its ambit, even the value
of the work paid by way of cash. In calculating
the turnover the said amount has to be taken
into consideration as representing the turnover
in the hands of the main contractor

Provisions under the judgement relating to the Provisions under the judgement relating to the
 State of Andhra Pradesh
Issue Raised:
Levy of works contract to main contractor
Important provisions discussed:
a) Charge to tax U/s. 4(7)(a)
b) Treatment of works contracts U/r 17(1)(a)
Section in Brief:
‘Charge to tax’ U/s. 4(7)(a): Notwithstanding
anything contained in the Act,
(a) Every dealer executing works contracts shall pay
tax on the value of goods at the time of
incorporation of such goods in the works executed
at the rates applicable to the goods under the
Act,
(i)
(ii) a transfer of property in goods (whether as
‘Treatment of works contracts’, Rule 17(1)(a) In
the case of contracts not covered by sub-rule (2),
(3) and (4) of this rule, the VAT dealer shall pay
tax on the value of the goods at the time the
goods are incorporated in the works at the rates
applicable to the goods.
State of Karnataka
Issue Raised:
Levy of Re-sale tax on main contractor
Important provisions discussed:
a) Sale U/s 2(1)(t)
b)Total Turnover U/s 2(1)(u2)
Section in Brief:
‘Sale’ U/s. 2(1)(t) with all grammatical
variations and cognate expressions means every
transfer of property in goods other than b y way
of mortgage, hypothecation, charge or pledge by
one person to another in the course of trade or
commerce for cash or for deferred payment or
other valuable consideration, and include,-
………………………………….,
goods or in some other form) involved in the
execution of works contract.
‘Total turnover’ U/s. 2(u2) means the aggregate
turnover in all goods of a dealer at all places of
business in the State, whether or not the whole
or any portion of such turnover is liable to tax,
including the turnover of purchase or sale in the
course of inter-state trade or commerce or in
the course of export of the goods out of the
territory of India or in the course of import of
the goods into the territory of India.
'Turnover’ U/s. 2(v) means the aggregate
amount for which goods are bought or sold, or
supplied or distributed or delivered or otherwise
disposed of in any of the ways referred to in
 clause (t) by a dealer, either directly or through
another, on his own account or on account of
others, whether for cash or for deferred
payment or other valuable consideration.

On reading of the above provisions it is a basic question that arises as to why the courts have taken different views where
there are similar transactions involved.

As per the provisions under the Andhra Pradesh Value Added Tax Act, the incidence of levy of tax on transfer of property in
goods is at the time of incorporation of such goods in the works executed by every dealer. This provision again has the
overriding effect of all other charging section.

Rule 17(1)(a) under APVAT also specifies that, in the case of works contract other than works contract specified in rule (2),
(3) and (4) of rule 17 dealer shall pay tax at the time of goods are incorporated in the work.

On combined reading of the above provisions it is understood that, the incidence of levy of tax arises at the time of
incorporation of goods in the work. On the other hand it is the person executing the work who is liable to pay tax at the time
of incorporation of goods in the work. In this case, it is the sub-contractor who executes the work. Before executing work it
is sub-contractor who owns the goods. When executing the work [i.e., incorporation of goods] it is the contractee who
becomes the owner of the goods. In between contractor never become the owner of the goods, therefore it is not true that,
sale is taking place from main contractor without ownership rights on the goods. It has also been dealt in the above
judgement that, in case of deemed sales there cannot be double deemed sale.

On the other hand the Hon’ble Karnataka High Court has taken the view that, the ‘Turnover’ definition where it stars with
“aggregate amount for which goods are bought or sold, or supplied or distributed or delivered or otherwise disposed of in any
of the ways referred to in clause (t) by a dealer, either directly or through another”

It means an amount received or receivable for transfer or property in goods in the execution of works contract, either directly
or through another is a sale.

By analyzing the above interpretations, the author is of the view that, the courts have come to the different view in respect
of similar transaction because of the importance of the provisions of law as depicted under the relevant laws. Otherwise the
principles with regard to transfer of property in goods, between the main contractor, sub-contractor and contractee should be
one and the same. This can be observed from the following comparison of the provisions of APVAT Act, and KVAT Act.

Section in Brief: Section in Brief:

‘Charge to tax’ U/s. 4(7)(a): ‘Levy of Tax’ U/s. 3(1): The tax shall be levied on
Notwithstanding anything contained in the every sale of goods in the State by a registered dealer
or a dealer liable to be registered, in accordance with
 Act, the provisions of this Act

(b) Every dealer executing works contracts

shall pay tax on the value of goods at the
‘Liability tax and rates thereof U/s. 4(1) (c): In
time of incorporation of such goods in the
respect of transfer of property in goods (whether as
works executed at the rates applicable to
goods or in some other form) involved in the
the goods under the Act,
execution of works contract specified in column (2) of
the Sixth Schedule, Subject to …………………..,

‘Treatment of works contracts’, Rule

17(1)(a) In the case of contracts not
covered by sub-rule (2), (3) and (4) of this
rule, the VAT dealer shall pay tax on the
value of the goods at the time the goods
are incorporated in the works at the rates
applicable to the goods.

On reading of the above provisions, the view taken by the Hon’ble Supreme Court that, under works contract there is only
one deemed sales and not more than one based on the principle of accretion is not applicable when we are applying the
provisions of KVAT Act. This is because of the following reasons;

a) The charging section, though which is different for works contractor, but has not got separated from the main section. [i.e.,
both section 3 and section 4 are consistent that, tax shall be levied on dealer on every sale of goods based the nature and
type of sale]

b) There is no obstante or overriding provision in charging section.

c) The definition of ‘Turnover’ is not only restricted to transfer of property in the goods by a person executing works contract,
but also applicable to person who has entrusted such -kind of work to sub-contractor.

d) Under VAT, the levy of tax is multipoint. The tax is leviable on value addition. If the Hon’ble Supreme Court view is applied,
the main contractor may not be liable for value addition made for entrusting works contract to the sub-contractor. This is has
been explain as under:

Contractor entered into an agreement for construction of building for Rs.100/-. In turn the Contractor entrust the job to sub-
contractor for Rs.80/-. In this case the value addition made by the main contractor is Rs.20/-. As per Hon’ble Supreme Court
Judgement where the there is only one deemed sales, only sub-contractor is liable to tax on Rs.80/- after deducting labour
charges. There is no sale happening from main contractor to the contractee for the difference value of Rs.20/- which
represents the transfer of property in goods executed by the sub-contractor.

The author is of the view that, the principle laid down by the Hon’ble Karnataka High Court is considered to be more suitable
 and appropriate even under the VAT law, where the main contractor is liable to pay tax on the value addition made for
entrusting the job to sub-contractor. Even though the main contractor is not executing the work directly, there is a sale
taking place from main contractor to the contractee by virtue of entering into contract with the sub-contractor in pursuance
of the main contract. Finally it is concluded that, the view taken by the Hon’ble Supreme Court may lead to litigation with
respect to value addition made by the main contractor for levy of tax.

Source : The Article