State of A.P. &
Ors. Vs. Larsen & Tourbo Ltd. & Ors. [2008] INSC 1439 (26 August 2008)
Judgment
IN THE SUPREME COURT
OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 5239 OF 2008 (Arising
out of S.L.P. (C) No.12482 of 2007) State of Andhra Pradesh & Ors. ...
Appellant (s) versus Larsen & Tourbo Ltd. & Ors. .... Respondent (s)
S.H. KAPADIA, J.
1.
Leave
granted.
2.
Respondent
- Larsen & Tourbo Ltd. (L&T) is engaged in executing civil, mechanical
and other building works throughout India including Andhra Pradesh. During the
relevant period it entered into contracts with its clients (contractees) whose
names are given in the annexure to the 2 original writ petition filed in the
High Court of Andhra Pradesh. Under the Contract, L&T, with the consent of
the contractee, was permitted to assign parts of construction work to the
sub-contractors whose names are also given in the list annexed to the original
writ petition filed in the High Court.
Accordingly, L&T
placed orders on such sub-contractors for agreed price, inclusive of applicable
taxes. The overall work was done under the supervision of the consultants
nominated by the contractee. The sub-contractors were registered dealers. The
sub-contractors purchased goods and chattel like bricks, cement and steel and,
where necessary, supply and erect equipments such as lifts, hoist, etc. The
materials were brought to site. They remained the property of the sub-
contractors. The site was occupied by sub-contractors. The materials were
erected by the sub-contractors.
3.
L&T
was served with a notice dated 10.3.06 in which it was alleged that the Company
had failed to disclose the sub- contractors' turnover of Rs.111,53,05,835/- in
the returns filed upto 31.1.06 for the period 1.4.05 to 31.1.06. In reply, 3
L&T submitted that under Section 4(7)(a) of the Andhra Pradesh Value Added
Tax Act, 2005 ("2005 Act", for short) there was no provision for
inclusion of sub-contractors' turnover in the turnover filed by the Company;
that, the scheme of the said Act at the relevant time did not contemplate for
the declaration of sub-contractors' turnover and, that, under the scheme of the
said 2005 Act the sub- contractor was a "dealer".
4.
In
this case the sub-contractors were registered dealers.
This point is not in
dispute. It was submitted by the Company before the Assessing Authority that
the transfer of property in goods, as effected by the sub-contract, resulted in
direct sale to the contractee and consequently it did not involve multiple
sales either in favour of the main contractor or in favour of the contractee.
By the said reply, the Company specifically stated that it did not claim `input
tax credit' (ITC) on the tax invoice of sub-contractors. Accordingly, the
Company objected to the proposal made in the show cause notice by the A.O. to
4 recompute the tax liability adopting a uniform rate of 12.5% on the
sub-contractors' turnover.
5.
The
objections raised by the Company in its reply to the show cause notice were
rejected by the A.O. and the Company was consequently served with an assessment
order dated. 31.5.06 raising an additional tax payment of Rs.9,75,89,261/-.
6.
Aggrieved
by the assessment order dated 31.5.06, for the aforestated period, the Company
moved the Andhra Pradesh High Court vide Writ Petition No.12124 of 2006 and
challenged the following conclusion of the A.O. made in the assessment order
dated 31.5.06 which reads as under:
"Main contractor
is having an order from the contractee to purchase and sell goods in the course
of execution of works contract and for that matter, the main contractor should
acquire that goods from the sub-contractor, by way of deemed sale as well as
the main contractor, by way of deemed sale as well as the main contractor
should transfer the value of the property by way of deemed sales to the
contractee. The principles whatsoever apply to a sale in general squarely apply
to a deemed sale also. Therefore, herein cannot question the legislative wisdom
in framing the scheme of the Act giving a similar treatment to a deemed sale
that is given to a sale in general. It being so, there are two deemed 5 sales
one from main contractor to contractee and the other from sub-contractor to the
main contractor in the event of contractee not having any privity of contract
with sub-contractor." (emphasis supplied by us)
7.
The
question which needs consideration in this civil appeal is : whether the A.O.
was right in his conclusion, namely, that in this case there were two deemed
sales, one from main contractor to the contractee and the other from the
sub-contractors to the main contractor as there was no privity of contract
between the contractee and the sub-contractors.
8.
To
answer the above issue we need to quote relevant provisions of the 2005 Act
which reads as under:
"CHAPTER -I
PRELIMINARY SECTION 2 - Definitions.- In this Act, unless the context otherwise
requires:-- (10) 'Dealer' means any person who carries on the business of
buying, selling, supplying or distributing goods or delivering goods on hire
purchase or on any system of payment by instalments, or carries on or executes
any works contract involving supply or use of material directly or otherwise,
whether for cash or for deferred payment, or for commission, remuneration or
other valuable consideration, and includes:
6 (a) a company, a
Hindu undivided family or any society including a co-operative society, club,
firm or association which carries on such business;
(b) a society
including a co-operative society, club, firm or association which buys goods
from, or sells, supplies or distributes goods to its members;
(c) a casual trader,
as herein before defined;
(d) any person, who
may, in the course of business of running a restaurant or an eating house or a
hotel by whatever name called, sells or supplies by way of or as part of any
service or in any other manner whatsoever, of goods, being food or any other
article for human consumption or any drink whether or not intoxicating;
(e) any person, who
may transfer the right to the use of any goods for any purpose whatsoever
whether or not for a specified period in the course of business to any other
person;
(f) a commission
agent, a broker, a delcredere agent, an auctioneer or any other mercantile
agent, by whatever name called, who carries on the business of buying, selling,
supplying or distributing goods on behalf of any principal;
(16) 'Goods' means
all kinds of movable property other than newspapers, actionable claims, stocks,
shares and securities, and includes all materials, articles and commodities
including the goods as goods or in some other form, involved in the execution
of a works contract or those goods used or to be used in the construction,
fitting out, improvement or repair of movable or immovable property and also
includes all growing crops, grass and things attached to or forming part of the
land which are agreed to be severed before sale or under the contract of sale;
(19) 'Input tax'
means the tax paid or payable under the Act by a VAT dealer to another VAT
dealer on the purchase of goods in the course of business;
(28) 'Sale' with all
its grammatical variations and cognate expressions means every transfer of the
property in goods (whether as such goods or in any other form in pursuance of
a 7 contract or otherwise) by one person to another in the course of trade or
business, for cash, or for deferred payment, or for any other valuable
consideration or in the supply or distribution of goods by a society (including
a co-operative society), club, firm or association to its members, but does not
include a mortgage, hypothecation or pledge of, or a charge on goods.
Explanation VI:-
Whenever any goods are supplied or used in the execution of a works contract,
there shall be deemed to be a transfer of property in such goods, whether or
not the value of the goods so supplied or used in the course of execution of
such works contract is shown separately and whether or not the value of such
goods or material can be separated from the contract for the service and the
work done.
(29) 'Sale Price'
means :- (a) the total amount set out in the tax invoice or bill of sale; or
(b) the total amount of consideration for the sale or purchase of goods as may
be determined by the assessing authority, if the tax invoice or bill of sale
does not set out correctly the amount for which the goods are sold; or (c) if
there is no tax invoice or bill of sale, the total amount charged as the
consideration for the sale or purchase of goods by a VAT dealer or TOT dealer
either directly or through another, on his own account or on account of others,
whether such consideration be cash, deferred payment or any other thing of
value and shall include:
(i) the value of any
goods as determined by the assessing authority:
(a) to have been used
or supplied by the dealer in the course of execution of the works contract; or
(b) to have been delivered by the dealer on hire purchase or any other system
of payment by instalments; or (c) to have been supplied or distributed by a
society including a Co-operative Society, Club, firm or association to 8 its
members, where the cost of such goods is not separately shown or indicated by
the dealer and where the cost of such goods is separately shown or indicated by
the dealer, the cost of such goods as shown or indicated;
(ii) any other sum
charged by the dealer for anything done in respect of goods sold at the time
of, or before, the delivery of the goods;
(iii) any other sum
charged by the dealer, whatever be the description, name or object thereof;
(35) 'Tax invoice'
means a sale invoice containing such details as may be prescribed and issued by
a VAT dealer to another VAT dealer;
(38) `Taxable
turnover' means the aggregate of sale prices of all taxable goods;
(39) 'Total turnover'
means the aggregate of sale prices of all goods, taxable and exempted, sold at
all places of business of the dealer in the State, including transactions
falling under Section 8 of the Act and under Section 6A of the Central Sales
Tax Act, 1956 and shall also include the gross consideration received or
receivable towards execution of works contract;
(45) 'Works Contract'
includes any agreement for carrying out for cash or for deferred payment or for
any other valuable consideration, the building construction, manufacture,
processing, fabrication, erection, installation, laying, fitting out,
improvement, modification, repair or commissioning of any movable or immovable
property;
CHAPTER - III
INCIDENCE, LEVY AND CALCULATION OF TAX Section 4 - Charge to tax.- (7)
Notwithstanding anything contained in the Act;- 9 (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:
Provided that where
accounts are not maintained to determine the correct value of goods at the time
of incorporation, such dealer shall pay tax at the rate of 12.5% on the total
consideration received or receivable subject to such deductions as may be
prescribed;
(b) Any dealer
executing any works contracts for the Government or local authority may opt to
pay tax by way of composition at the rate of 4% on the total value of the
contract executed for the Government or local authority 1[***];
(c) Any dealer
executing works contracts other than for Government and local authority may opt
to pay tax byway of composition at the rate of 4% 2[***] of the total
consideration received or receivable for any specific contract subject to such
conditions as may be prescribed;
(d) Any dealer
engaged in construction and selling of residential apartments, houses,
buildings or commercial complexes may opt to pay tax by way of composition at
the rate of 4%of twenty five percent (25%) of the consideration received or
receivable or the market value fixed for the purpose of stamp duty whichever is
higher subject to such conditions as may be prescribed 3 [e) Any dealer having
opted for composition under 4[Clauses (b) or (c) or (d)], purchases or receives
any goods from outside the State or India or from any dealer other than a Value
Added Tax dealer in the State and uses such goods in the execution of the works
contracts, such dealer shall pay tax on such goods at the rates applicable to
them under the Act and the value of such goods shall be excluded for the
purpose of computation of turnover on which tax by way of composition at the
rate of four percent (4%) is payable.] 1 Omitted for the words "and in
such cases, the tax at 4% shall be collected at source by such contractee and
remitted to Government in such manner as may be prescribed" by Act 5 of
2007, dt. 22.01.2007, w.e.f. 01.09.2006 2 Omitted for the words "of fifty
percent (50%) by Act NO.23 of 2005, w.e.f. 29.08.2005 3 Inserted by Act No.23
of 2005, w.e.f. 29.08.2005 4 Substituted for the words "clauses (b), (c)
and (d)" by Act 5 of 2007, dt. 22.01.2007, w.e.f. 01.09.2006.
1 0 5 [f)] Any
dealer who is liable to be registered for TOT and executing any works contracts
shall pay tax at the rate of 1% on total value of the goods at the time of
incorporation of the goods used:
Provided that where
accounts are not maintained to determine the correct value of the goods at the
time of incorporation, such dealers shall pay tax at the rate of 1% on the
total consideration received or receivable subject to such deductions as may be
prescribed.
6 [***] 7 [(g)
notwithstanding any thing contained in clauses (a) to (f) above, no tax shall
be leviable on the turnover of transfer of property in goods whether as goods
or in some other form involved in the execution of works contract, if such
transfer from the contractor to the contractee constituted a sale in the course
of interstate trade or commerce under section 3 or a sale outside the State
under section 4, or a sale in the course of import or export under section 5 of
the Central Sales Tax Act, 1956;
(h) no tax shall be payable
under 8[clauses (a) or (b) or (c) of] this sub-section on the turnover relating
to amounts paid to a sub- contractor as consideration for the execution of
works contract whether wholly or partly subject to the production of proof that
such sub- contractor is registered as a VAT dealer under the Act and the
turnover of such amount is included in the return prescribed filed by such
sub-contractor.] 8 [(i) no tax shall be payable under clause (d) of this
sub-section on the turnover relating to the consideration received as a
sub-contractor if the main contractor opted to pay tax by way of composition
subject to the condition that the sub-contractor shall pay tax in respect of
any goods purchased or received from outside the State of Andhra Pradesh or from
5 Renumbered by Act No.23 of 2005, w.e.f. 29.08.2005 6 The proviso was omitted
by Act 5 of 2007, dt.22.01.2007, w.e.f. 01.09.2006.
The earlier proviso:
"Provided further that no tax shall be payable under this sub-section on
the turnover relating to the consideration received as a sub-contractor if the
main contractor opted to pay tax by way of composition subject to the condition
that the sub-contractor shall pay tax in respect of any goods purchased or
received from outside the State of India or from any person other than a Value
Added Tax dealer in the State on the value of such goods at the rates
applicable to them under the Act".
7 Added by Act 5 of
2007, dt.22.01.2007, w.e.f. 01.09.2006 8 Added by Act No.39 of 2007, dt.
18.12.2007, w.e.f. 01.09.2006 8 1 1 any person other than a Value Added Tax
dealer in the State on the Value of such goods at the rates applicable to them
under the Act.]
9.
We
also quote relevant provisions of the Andhra Pradesh Value Added Tax Rules,
2005 (as it stood at the relevant time) which read as under:
"RULE 17.
Treatment of works contracts. - (1) Treatment of VAT dealer executing works
contract : - (a) In the case of contracts not covered by sub-rules (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 work at the rates applicable to the
goods;
(c) If such VAT
dealer awards any part of the contract to a sub- contractor, such
sub-contractor shall issue a tax invoice to the contractor for the value of the
goods at the time of incorporation in such sub-contract. The tax charged in the
tax invoice issued by the sub-contractor shall be accounted by him in his
returns.
(e) Subject to clause
(d) the following amounts are allowed as deductions from the total
consideration received or receivable for arriving the value of the goods at the
time of incorporation, - (i) Labour charges for execution of the works;
(ii) Charges for
planning, designing and architect's fees;
(iii) Charges for
obtaining on hire or otherwise machinery and tools used for the execution of
the works contract;
(iv) Cost of
consumables such as water, electricity, fuel, etc., used in the execution of
the works contract, the property in which is not transferred in the course of
execution of a works contract;
(v) Cost of
establishment of the contractor to the extent it is relatable to supply of
labour and services;
1 2 (vi) Other
similar expenses relatable to supply of labour and services;
(vii) Profit earned
by the contractor to the extent it is relatable to supply of labour and
services;"
10.
We
also quote Article 366(29A)(b) of the Constitution of India which reads as
under:
"366.
Definitions. In this Constitution, unless the context otherwise requires, the
following expressions have the meanings hereby respectively assigned to them,
that is to say - (29A) "tax on the sale or purchase of goods"
includes - (b) a tax on the transfer of property in goods (whether as goods or
in some other form) involved in the execution of a works contract;
and such transfer,
delivery or supply of any goods shall be deemed to be a sale of those goods by
the person making the transfer, delivery or supply and a purchase of those
goods by the person to whom such transfer, delivery or supply is made;"
11.
The
only question which we are required to decide is :
whether the turnover
of Rs.111,53,05,835/- of the sub- contractors is liable to be added to the
turnover of L&T? On the turnover of L&T, it is liable to pay the tax
and that is not 1 3 in dispute. What is in dispute is the addition of sub-
contractors' turnover to the turnover of L&T.
12.
A
contract of work, i.e., "works contract" involves transfer of
property and also element of service or work rendered. That is why it is called
composite contract. Works contracts can be of two types only:
(a) Works contracts
for constructions; and (b) Works contract in relation to any movable property
like repairs to vehicles, printing contracts etc.
13.
In
the first case of The State of Madras v. M/s. Gannon Dunkerley & Co.,
(Madras) Ltd.- [(1958) 9 STC 353] this Court held that if the words "sale
of goods" have to be incorporated in their legal sense, that sense can
only be what it has in the law relating to sale of goods. Accordingly, this
Court opined that the expression "sale of goods" involves existence
of an agreement between the parties for the sale of goods in which eventually
property passes.
14.
The
judgment of the first case of Gannon Dunkerley (supra) necessitated an
amendment to Article 366 of the Constitution. Thus, the (Forty-Sixth Amendment)
Act, 1982 to the Constitution inserted clause 29A to Article 366 of the
Constitution, inter alia, inserting the definition of "tax on the sale or
purchase of goods". Insertion of clause 29A thus empowers the States to
levy the tax on deemed sale. This amendment enables States to levy tax on
transfer of property in goods involved in the execution of works contract. The
validity of this Amendment was upheld by this Court in the case of Builders'
Association of India and others v. Union of India and others - [(1989) 73 STC
370).
15.
According
to the judgment of the Constitution Bench of this Court in the case of M/s
Gannon Dunkerley and Co. and others v. State of Rajasthan and others - [(1993)
88 STC 204], the measure for the levy of tax contemplated by Article
366(29A)(b) of the Constitution is the value of the goods involved in the
execution of a works contract.
16.
In
this case we are concerned with Andhra Pradesh Value Added Tax Act, 2005.
Section 4 is the charging section.
It comes in Chapter
III which deals with `incidence, levy and calculation of tax'. In this case, we
are concerned with the taxability of works contract. That subject is dealt with
by Section 4(7) of the said 2005 Act. In our view, Section 4(7) is a Code by
itself. It begins with a non-obstante clause. It, inter alia, states that every
dealer executing works contract 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. The point to be noted is that Section 4(7)(a) of the
2005 Act indicates 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
value of the goods which constitutes the measure for the levy of the tax is the
value of the goods at the time of the incorporation of the goods in the works.
What is stated hereinabove also finds place in Rule 17(1)(a) of the APVAT Rules
2005, quoted hereinabove. It is important to note that 1 6 each of the
sub-contractors of L&T is registered dealer. None of them are unregistered.
Under Section 4(7)(a) read with Rule 17(1)(c), quoted above, where VAT dealer
awards any part of the contract to a sub-contractor, such sub-contractor shall
issue a tax invoice to the contractor for the value of the goods at the time of
incorporation in such sub-contract. The tax charged in the tax invoice issued
by the sub-contractor shall be accounted by him in his returns. Therefore, the
scheme indicates that there is a "deemed sale" by the dealer
executing the work, i.e., the sub-contractor. It is only the sub- contractor
who effects transfer of property in goods as no goods vests in the respondent
company (contractor) so as to be the subject-matter of a retransfer. 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
sub-contractor(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 sub-contractor(s), L&T
ceases to execute the works contract in the sense contemplated by 1 7 Article
366(29A)(b) because property passes by accretion and there is no property in
goods with the contractor which is capable of a retransfer, whether as goods or
in some other form.
17.
The
question which is raised before use is : whether the turnover of the
sub-contractors (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 sub- contractors
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 the 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."
(emphasis supplied by
us)
18.
As
stated above, according to the Department, there are two deemed sales, one from
the main contractor to contractee and the other from sub-contractor(s) to the
main contractor, in the event of the contractee not having any privity of
contract with the sub-contractor(s).
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 sub-
contractor, that would not do away the principle of transfer of property by the
sub-contractor 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 Section 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 1 9
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 may result 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.
20.
Before
concluding, we may refer to one more aspect. It appears that after the impugned
judgment, the Department has amended Rule 17 of the APVAT Rules, 2005 vide
Government Order dated 20.8.2007. The position has been clarified vide Rule
17(1)(c) (as amended). It is now clarified that where a VAT dealer awards any
part of the contract to a registered sub-contractor, no tax shall be payable on
the consideration paid for the sub-contract. Therefore, in our view, the
principle to be adopted in all such cases is that the property in the goods
would pass to the owner/contractee on its incorporation in the works executed.
This principle finds place in sub-section 7(a) of Section 4 of the said 2005
Act.
21.
On
the facts of the case, it has been urged on behalf of the Department that the
respondent company has not complied with the provisions of Rule 17(1)(c) as it
stood at the relevant time, which require the sub-contractor(s) to issue tax
invoice to the L&T which invoices would have indicated the value of the
goods at the time of incorporation in such sub- contract and which would have
indicated the tax charged.
This point is
seriously disputed. According to the respondent company it did produce all tax
invoices received from the sub- contractors but the A.O. proceeded on the basis
that there were two deemed sales, one from main contractor to contractee and
the other from the sub-contractors to the main contractor and consequently the
A.O. did not look into the tax invoices of the sub-contractor(s). In this
connection, we may state that the A.O. decided the matter on principle. The
respondent company has annexed a list to the original writ petition in which it
has given all the details regarding works contract turnover including the value
of the work done by the sub-contractor(s).
22.
For
the aforestated reasons, we see no reason even on facts to interfere in the
matter, however, in future we expect the A.O. to call for individual
contract(s), tax invoice(s) and call such particulars require to be submitted
by the assessee before adding the turnover of the sub-contractor to the
turnover of the contractor.
23.
We
find no infirmity in the impugned judgment dated 12.10.06 delivered by the High
Court in the Writ Petition No.12124 of 2006. Accordingly, this civil appeal
stands dismissed with no order as to costs.
.................................J.
(S.H. Kapadia)
.................................J.
(B. Sudershan Reddy)
New
Delhi;
August
26, 2008.
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