Payment to Sub-Contractors cannot be added to the Total Turnover under the Karnataka Sales Tax Act, says Supreme Court.
The two-judge bench of the Supreme Court of India, today held that, under the provisions of section 6-B of the Karnataka Sales Tax Act, 1957, the value of work entrusted to the sub-contractors and the payment made to them are liable to be excluded from the total turnover.
The appellant is an assessee under the Karnataka Sales Tax Act, is doing the business of engineers and contractors, also executes projects under contracts with public sector undertakings, local bodies as well as the Union and the State Governments, besides private sector. The contracts which are secured by the assessee are the works contracts and a part thereof is generally assigned to sub-contractors.
The Assessing Officer, while completing assessment added the payment made to the sub-contractors to the total turnover. The assessee maintained that the said amount cannot be added to the turnover since the sub-contractors, who are dealers under the Act, has already paid tax in respect of the works undertaken by them.
On appeal, all the appellate authorities including the High Court has upheld the assessment order. Being aggrieved, the assesse filed an appeal before the Supreme Court raising the following fundamental questions. Firstly, whether the assesse can be held liable to pay turnover tax on payment made to the sub-contractor by considering the fact that the sub-contractor had declared the turnover and paid tax? Secondly, the term “turnover” defined under section 2(1)(5)Karnataka Sales Tax Act includes such payments made to the sub-contractors?
The bench comprising of Justice A K Sikri and Justice R F Nariman observed that, the term ‘sales’ has been defined under the Act as transfer of the property in goods by one person to another in the course of trade or business for consideration and it, inter alia, includes a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. Thus, even in respect of works contract whenever there is a transfer of property in goods, that is deemed as ‘sale’.
In the light of the above finding, it was opined that “An essential element to constitute a transaction as ‘sale’ is the transfer of property in goods. Aggregate amount for which the goods are bought or sold, or supplied or distributed or delivered or otherwise disposed of, in any of the ways referred to under Section 2(t), by a dealer is treated as ‘turnover’ within the meaning of Section 2(v) of the Karnataka Act. There are two variants of this turnover known as ‘taxable turnover’ and ‘total turnover’, the definitions whereof are already reproduced above. ‘Total turnover’ is defined as aggregate turnover in all goods of a dealer at all places of business in the State. However, from this aggregate turnover, certain deductions are permissible under the provisions of the Karnataka Act and when those deductions are allowed from the total turnover, we get ‘taxable turnover’ on which a dealer is liable to pay tax.”
“On a plain reading of Sections 5-B and 6-B of the Karnataka Sales Tax Act, it can be seen that Section 5-B deals with levy of tax on transfer of property in goods involved in the execution of the works contract. It is, thus, a special provision made for imposing sales tax on works contract and taxis payable on ‘taxable turnover of transfer of property in goods’. Additionally, in those cases where total turnover of a registered dealer in an year is not less than the turnover specified in sub-sections (1) and (2) of Section 10, such a dealer is liable to pay tax at the rate specified in Section 6-B of the Karnataka Act.”
While delivering the judgment in favour of the assesse, the Court also observed that “What is significant is that total amount paid or payable to the dealer as a consideration for ‘transfer of property in goods’, which is involved in execution of the works contract, is to be treated as ‘total turnover’. This Rule, thus, specifically restricts the total turnover in respect of those goods, alone, where the property has been transferred. Thus, transfer of property in goods, becomes necessary event and unless there is a transfer of property, the amount paid is not to be included in the total turnover. The amount paid to the sub-contractor is not for transfer of property in goods. When matter is examined from this angle, the ratio laid down by this Court in the Andhra Pradesh judgment clearly applies inasmuch as in that case also the Court noticed that Section 4(7) of the Andhra Pradesh Act indicated that the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works. The Court held that the value of the goods which constitute the measure for the levy of tax is the value of goods at the time of the incorporation of the goods in the works. The Court further found that same was the position contained in Rule 17(1)(a) of the Andhra Pradesh Value Added Tax Rules, 2005.
Referring to the decision of the Andhra Pradesh High Court, the Court held that the value of the work entrusted to the sub-contractors or payments made to them shall not be taken into consideration while computing total turnover for the purposes of Section 6-B of the Karnataka Act.
Read the full text of the Judgment below.
