By G. G. Goyal, Chartered Accountant
C. B. Thakar, Advocate
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VAT
A very interesting question was dealt with by Andhra Pradesh
High Court in the case of Larsen & Toubro Ltd. & Others, reported in 148 STC 616
(A.P.). The facts were that L&T received a contract from its customer (contractee).
Part of the contract was executed through subcontractors. The sub-contractors
had issued tax invoices to L&T and tax on the same was paid by the respective
sub-contractors. L&T was assessed for the period 1-4-2005 to 31-1-2006 under A.P.
VAT Act. In the returns filed for the above period, L&T had not included the
turnover affected through subcontractors. The Assessing Officer was of the view
that such turnover is includible in the turnover of L&T.
L&T argued that there was no such need in view of particular
provisions of the A P Vat Act and also on the principle of single transaction
theory. In other words, L&T contended that there was direct sale by the
subcontractors to the contractee and hence no turnover of subcontractor was
includible in its turnover. The Assessing Officer held that there was sale by
subcontractor to L&T i.e., to the principal contractor and again by L&T
to the contractee. In view of the above, the Assessing Officer held the turnover
affected through subcontractors as liable to tax in the hands of L&T. L&T filed
writ petition in the Andhra Pradesh High Court. The High Court held that in view
of the established position by the judgment of Supreme Court in the case of
Builders’ Association of India (73 STC 370), the turnover of subcontractor is
not includible in the turnover of L&T.
Against the above judgment the State of A.P. filed SLP in the
Supreme Court. The Supreme Court has now decided this issue vide its judgment in
State of Andhra Pradesh and Others v. Larsen & Toubro Ltd. & Others. The
judgment is reported in 2008 VIL 30 SC dated 26-8-2008. The Supreme Court has
dealt with the issue in the light of specific provisions of the A.P. VAT Act and
also the Constitution’s provisions like Article 366(29A)(b).
The Supreme Court observed that there can be two types of
works contracts : one, relating to construction and two, relating to movable
properties like repairs, etc. . . After taking note of the judgment of the
Supreme Court in the case of Gannon Dunkarley and Co. (9 STC 353), the Supreme
Court referred to the 46th amendment made to the Constitution by which deemed
sale categories were provided by way of Article 366 (29A). The Supreme Court
also observed that the above amendment to the Constitution has been approved by
the Constitution Bench in the case of Builders’ Association of India (73 STC
370). The Supreme Court also noted the provision in the A.P. Act which provides
for payment of tax on the value of the goods at the time of incorporation of
such goods in the works executed at the rates applicable to the goods. In
the light of above, the Supreme Court held that the taxable event is transfer of
property in goods involved in the execution of works contract and the said
transfer of property takes place when the goods are incorporated in the works.
The value at such point of time is a taxable value. In view of the above
provision, the Supreme Court observed that the scheme of taxation indicates that
there is a ‘deemed sale’ by the dealer executing the work, i.e., in this
case the subcontractor. The Supreme Court further observed that it is the
sub-contractor only, who affects transfer of property in goods, as no goods
vests in the main contractor, so as to be subject matter of a re-transfer. The
Supreme Court, in fact, observed as under :
“‘By virtue of Article 366 (29A)(b) of the Constitution
once the work is assigned by the contractor (L&T), the only transfer of
property in goods is by the subcontractor(s) who is a registered dealer in
this case and who claims to have paid taxes under the Act on the goods
involved in the execution of the works. Once the work is assigned by L&T to
its subcontractor(s), L&T ceases to execute the works contract in the sense
contemplated by Article 366(29A)(b), because property passes by accretion and
there is no property in goods with the contractor which is capable of a
re-transfer, whether as goods or in some other form.
17. The question which is raised before us is : whether the
turnover of the subcontractors (whose names are also given in the original
writ petition) is to be added to the turnover of L&T. In other words, the
question which we are required to answer is : whether the goods employed by
the subcontractors occur in the form of a single deemed sale or multiple
deemed sales. In our view, the principle of law in this regard is clarified by
this Court in the case of Builders’ Association of India (supra) as
under :
“Ordinarily, unless there is a contract to the contrary, in
case of works contract the property in the goods used in the construction of a
building passes to the owner of the land on which the building is constructed,
when the goods or materials used are incorporated in the building.”
On behalf of the State of A.P. the argument was that there
are two deemed sales i.e., one from subcontractor to main contractor and
the other from main contractor to contractee. It was emphasised that contractee
has no privity of contract with the sub-contractor, hence it cannot be a single
transaction. On the above line of argument, the Supreme Court observed as
under :
“19. If one keeps in mind the above-quoted observation of this Court in the case of Builders’ Association of India (supra), the position becomes clear, namely, that even if there is no privity of contract between the contractee and the subcontractor, that would not do away with the principle of transfer of property by the subcontractor by employing the same on the property belonging to the contractee. This reasoning is based on the principle of accretion of property in goods. It is subject to the contract to the contrary. Thus, in our view, in such a case, the work executed by a sub-contractor results in a single transaction and not as multiple transactions.
This reasoning is also borne out by S. 4(7) which refers to value of goods at the time of incorporation in the works executed. In our view, if the argument of the Department is to be accepted, it would result in plurality of deemed sales which would be contrary to Article 366(29A) (b) of the Constitution as held by the impugned judgment of the High Court. Moreover, it mayresult in double taxation which may make the said 2005 Act vulnerable to challenge as violative of Articles 14, 19(1) (g) and 265 of the Constitution of India as held by the High Court in its impugned judgment.”
Thus, it can be said that the legal position which emerges at present is that in relation to construction activity, even though the subcontractors are involved, still there cannot be multiple transactions. The taxation will be only once. The Supreme Court has not dealt with the issue about such transactions in relation to moveable properties. It also appears that in relation to construction activity if there is anything contrary to the above understanding, then the position may be different. This is evident from observations in para 19 reproduced above. It may also be worth noting that in relation to similar construction activity, in case of L&T only, the Karnataka High Court has taken a different view while dealing with levy of turnover tax under the erstwhile Karnataka Sales TaxAct and it is held that there are multi-point transactions, one from subcontractor to main contractor and the other from main contractor to contractee. This judgment is reported in 16 VST 616. However, the judgment is dated 3-2-2006, that is prior to the above Supreme Court judgment. In view of this latest judgment of the Supreme Court, the controversy should be laid to rest.
Recent amendment – Scope of E-filing of returns expanded:
The Commissioner of Sales Tax, Maharashtra State, has issued Notification under Rule 17(5)(a) of the MVAT Rules, 2005 dated 30-8-2008. By this Notification the scope of E filing of returns has been expanded. Hitherto, dealers having tax liability exceeding Rs.I0 lakhs or refund exceeding Rs.l crore in the previous year (i.e., liable to file monthly returns) were liable to file E-returns. Now dealers having tax liability exceeding Rs.l lakh or refund exceeding Rs.I0 lakhs in the previous year are also made liable to file E-returns. In other words, in addition to dealers filing monthly returns, dealers filing quarterly returns are also now required to file E-returns. This position applies from the quarter starting 1st July, 2008. Therefore, for the quarter ending 30th September, 2008 and onwards, dealers covered by provisions of quarterly returns, will be required to file their returns by way of E-returns. Dealers filing monthly returns will continue to file E-returns, as earlier.
