Annexure-1 SUB-CONTRACTING In View of Accounting Principles Subcontracting is a common feature in Indian Construction Sector. Many standard contract forms are allowing Sub-contracting considering it as an essential feature of the contracting. However, some contracts are allowing the Contractor to Sub- contract only a percentage of work as sub-contracts and some forms are considering certain type of works only for sub-contracting, A Sub-contractor always remained as a third party to the contract, unless he is appointed by the Employer himself as a Nominated sub-contractor under FIDIC form of contract. Generally, sub-contractor in general will have no right in indulging in the contract between the Employer and Contractor. As such Sub-contracting will be a transaction between the Main, contractor and the Sub-contractor only. The Employer will not take any responsibility, of the Sub-contractor works. He will be, at the best, considered as a Project Manager of the Contractor only. The quality of work, timelines, execution of works as per the instruction of the Engineer etc, by the Sub-contractor also considered as that of the main contractor only. Ultimately, the main contractor only responsible for all nitty-gritties of the contractual compliances. ‘The Employer will fix the main contractor only for any delays and defaults of the sub-contractors and entire risk of the subcontracted works will be on the head of the prime contractor only. With respect to payments also, the Employer should mot consider the Sub-contractor as an independent entity. In any circumstances, if the’ Employer intends to pay a sub-contractor directly, the same shall be paid through and as a part of the Main Contractor's account only, as the Employer cannot divide the contract. Page 1 of 6ACCOUNTING PRACTICE: When a work executed by the sub-contractor is to be measured, billed and paid, the same will be done in the name of the main contractor only, as the contract is existing with the main contractor only. The sub-contractor will have no contractual right and the Employer will have any contractual obligation with respect to sub-contracting. ‘The Employer shall have no right to vitiate the contract in any manner, The Employer will not take any responsibility of the contract between the Main Contractor and Sub-contractor. If it takes such responsibility, it has to take several risks emerges out of such situations, Further, the main contractor will have the responsibility for the payments of the sub- contractor. Employer will not indulge in sub-contracting payment affairs, because such indulgence may lead to far reaching legal consequences. ‘The agreed accounting practice is - the Main Contractor will pay the agreed amounts" to the sub contractor by retaining the amounts for IT by issuing form 26-B. Now, the GST also applicable for subcontracting throughout India and the sub contractor also shall pay the GST. If the sub contractor procures materials in his own name, the tax burden will be on the sub-contractor only. However, the Employer will not take any responsibility about the tax compliances of the sub-contractors. All the monies will be recovered as TDS from the main contractors account only and credited to the main contractor only. Any action taken in contravention to the same will throw the Employer into a mess of taxation. Payments to Sub-contractors: In case of main contractor does not pay to the sub-contractor, the Employer cannot interfere in between the main contractor and sub-contractor. Un-official initiatives can be taken in the interest of the work. In case, if there is an arrangement between the Employer, Contractor and the Sub-contractor, with respect to making payment directly to the Sub-contractor, the Employer should not take any risk on account of such arrangement. In this connection: Page 2 of 6a) The Employer can pay any amounts to the Sub-contractor on the written request of the main contractor, in which the purpose and amount should be mentioned clearly. b) Contract account shall be maintained in the name of the main contractor only with whom a contract is existing. Hence, all the taxes and other recoveries shall be charged to the main contractor only in all situations. ©) The Sub-contractor should not be allowed as a party to the contract by involving them in the contracting procedure, as there is no contractual. relationship between the Sub-contractor and the Employer. Any such act, which create an out of the way contract, an extranrious contract or an independent contract to the main contract will turn into a serious legal issue and the Employer may forced to make double payment at times - if the extra contractual matters moved into legal tussel. ‘The rates of the Sub-contractor: ‘The rates of the sub-contractor solely rely on the negotiations between the Main Contractor and Sub contractor. It is normal practice in sub-contracting that the main contractor will pay lesser rate than the BOQ rate. As the Risk bearer and as, the party borned initial contract expenditure, the Main Contractor keeps a portion of the contract amount to himself. Whatever the amount he pays to the Sub-contractor and whatever the terms agreed by them, the Main Contractor has to take the entire contractual risk on his own shoulders. If the Employer takes in the Sub-contractor on a separate contract and pay the bills directly to the said Sub-contractors in their name and account that will lead to legal implications. Hence, no Employer will accept to take in Sub-contractors as independent contractors. The Employer cannot create a separate contact with the subcontractor within or outside the main contract. Page 3 of 6‘There are several court cases, where courts have considered extra contractual relation with Sub-contractors as illegal and hence void. In the Andhra Pradesh State Contracting Manuals (APDSS) there is a facility to the Employer under clause 60 (C) that the Employer can take back certain portion’ of work from the Main Contractor with a notice and handover the same to another contractor by entering into with a separate contract agreement. In such event, the main contractor will not have any responsibility on that part. The FIDIC Nominated Sub-contracting System: The FIDIC contract forms have evolved an independent Sub-contacting system, called “Nominating Sub-contractors”. The Employer can set aside a key portion of work from the project and he can appoint his choice of Sub-contractors to execute such works at the bidding stage itself. The Nominated Sub-Contracting ‘System is different from the 60(C) of APDSS, mentioned supra. The ‘Nominated” Sub-contractor’ has to work under the Main Contractor and get the payment from the Main Contractor. But the Main Contractor will not have any responsibility with respect to the works of the Nominated Sub-contractor. The Employer, if necessary, with the arrangement of the main contractor, can withdrawn a portion of work from the Main Contractor, and handed over it to the Nominated Sub-contractor, where in the Employer will own the Nominated Sub-contracting, risk in place of the Main Contractor. However, the main contractor has to give his consent to the same in writing. Further, there is no contractual facility for the same in FIDIC contract. The J&K ERA Case:- Our teams have verified the J&K ERA Doodganga and Athwajan package works and examined the Clause 4.4 of Sub-contracting and Clause 5 of the Nominated Sub-Contracting. Clause 4.4 of contract is a normal Sub- Contracting procedure only, and it will applicable when all the Sub-contracting risks will lie on the Main Contractor only. ‘The clause 5 Nominated Sub-Contracting System is not utilized Page 4 of 6by the ERA. No work was allotted for Nominated Sub-contracting while proposing the Bids. Hence, the clause 5 remained as a non-operative clause. However, the events in the contract are revealing that the Employer started “Direct Payment Mechanism’ as stated in the clause 5-5 of GCC. The said clause will be applicable only if the contractor not paid the bills of the Nominated Sub- Contractor employed by the Employer, even after making the payments to the Main Contractor, In such event only, the Employer can pay directly to the Nominated Sub-contractor, because there will be a contractual relation between, the Nominated Sub-contractor and the Employer. However, the Employer will not possess any such right, or it cannot take such responsibility with respect to the Contractor's Sub-contractors. If the Respondent pay amounts to the Contractor's Sub-contractors (clause 4.4 sub-contractors) directly in consideration of clause 5.5 of GCC that will become a serious contractual flaw and the Employer has to bare the brunt. The Main Contractor can sue the Employer, for consequential damages, as the said acts will be considered as contrary to the contract terms and thus it becomes a breach to contract. : Further, ifthe Employer if pay to the said Sub-Contractors what is agreed by the Main Contractor under the Sub Contract Agreement between them and that too. accounted for to the Main Contractor's account, that will save the situation. If the Employer pays the BOQ rate to the said Sub-contractors and pay bills on account of sub-contractors, it will open the Pandora's box and turn into a huge legal tussel. Full record required to verify how the Employer made payments to the Sub-contractors and what actually happens in the contract to specify what extent the contract was compromised and what will be the implications on the Main contract between the Employer and the Contractor. If the Respondent credit the ‘TDS recovery also to the Sub-Contractor’s account, such acts will be considered as creation of a New Contract without any authority to do so, and the same will ‘become an act of breech. Page 5 of 6S.No. Direct Payments to Sub- contractors, as per the Main contract under clause 5 Direct Payments to clause 4.4 Sub-contractors as Independent Contractors Can pay sub-contractor directly on the written request of the Main Contractor. However, any payment shall be made to the sub-contractor on account of the Main Contract only. Can pay the amounts directly to the sub-contractors by considering the sub-contractors as separate contractors. All taxes recovered shall be credited to the main contractor account. No taxes shall be credited to the sub-contractors as there is no contractual relation. The burden of the sub- contractors work quality, defect liability will be continued on the ‘Main Contractor ‘The burden will be shifting out from the Main contractor and it may raise further claims showing breach. Page 6 of 6