No Double Taxation on Works Contracts: Supreme Court confirms Deduction for Sub-Contractor Payments under KVAT [Read Judgement]

The Supreme Court of India has confirmed that there can be no double taxation on works contracts under the Karnataka Value Added Tax Act, 2003 (KVAT Act), upholding the Karnataka High Court’s decision that principal contractors are entitled to deduct payments made to registered sub-contractors from their taxable turnover.

In thIS case of M/s Skyline Construction and Housing Pvt. Ltd., the apex court dismissed the State’s appeal and held that when a portion of a works contract is executed by sub-contractors, the principal contractor cannot be taxed again on the same value of work.

The Court ruled that allowing taxation on both the main contractor and the sub-contractor for the same transaction would amount to impermissible double taxation.

The respondent-assessee, M/s Skyline Construction, engaged in building construction, had sought an advance ruling on whether payments made to sub-contractors were to be included in its taxable turnover under Section 15 of the KVAT Act for the period 2005-06.

The Authority for Clarification and Advance Rulings had denied such deduction, citing the absence of a specific provision before March 31, 2006, allowing reduction for sub-contractor payments.

However, the Karnataka High Court reversed this view, holding that once the sub-contractor pays VAT on the portion of work executed by them, the same cannot form part of the main contractor’s turnover.

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“The High Court allowed the appeal filed by the respondent-assessee taking the view that in case of execution of a works contract through a sub-contractor, the sub-contractor was liable to pay tax under the VAT Act and therefore the payment made by the main contractor to the sub-contractor was not liable to be included in the taxable consideration of the main contractor as this would lead to double taxation. It was further held that the deduction for payment made to the sub-contractors would be admissible provided such sub-contractors were registered under the VAT Act and they had paid tax”. The same ruling of the high court was upheld by the court.

Before the Supreme Court, the State contended that the total turnover under Section 15 must include all consideration received by the principal contractor, regardless of payments made to sub-contractors. It argued that there was no explicit statutory deduction available prior to 2006 and relied on the decision in State of Kerala v. Builders Association of India(1997) 2 SCC 183.

The Bench of Justices J.B. Pardiwala and K.V. Viswanathan said that the reasoning of the High Court was consistent with the principles laid down in State of Andhra Pradesh v. Larsen & Toubro Ltd.

According to the court, in a works contract, the transfer of property in goods occurs through the principle of accretion directly from the sub-contractor to the contractee. Therefore, the same portion of work cannot be taxed again in the hands of the principal contractor merely because the contract was originally awarded to him.

The Court clarified that under the KVAT Act, “total consideration for works contract executed” by a dealer refers only to the portion of work actually executed by the principal contractor himself. Where a sub-contractor has executed part of the work, received payment, and paid VAT on it, that portion must be excluded from the main contractor’s taxable turnover.

While dismissing the appeal, the Supreme Court concluded that the deduction of sub-contractor payments is a necessary and lawful adjustment to determine the correct taxable value under Section 15(1) of the KVAT Act.

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