STATE OF ANDHRA PRADESH ORS. v. LARSEN AND TOURBO LTD. AND ORS

Citation: [2008] 12 S.C.R. 843

Court: Supreme Court of India

Bench: S.H. KAPADIA, B. SUDERSHAN REDDY

Case summary

STATE OF ANDHRA PRADESH ORS. v. LARSEN AND TOURBO LTD. AND ORS.pdf

Judgment text

Dismissing the appeal, the Court ~ELD: 1. 1. Section 4(7) of the Andhra Pradesh Value Added Tax Act, 2005 is a Code by itself. It begins with a non-obstante clause. It sta! es that every dealer executing works contract shall pay tax on the value of go. ods at the 8 time of incorporation of such goods in the works execi1ted at the rates applicable to the goods under the Act. 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 works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works. [Para 16] 1- The State of Madras v. Mis. Gannon. Dunkerley and Co. (Madras) Ltd. (1958) 9 STC 353; Mis. Gannon Dunkerley and Co. and Ors. v. State of Rajasthan. and Ors. (1993) 88 STC 0 204 - referred to. 1. 2. The sub-contractors. of 'L&T were registered dealers. None of them were u~registered. Under s. 4(7)(a) .

read with Rule 17(1)(g) of APYA1 Rules, 2005, 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 ih 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 goo. ds 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 who is a registered dealer and who c! a! ms to hai1e paid taxes under the Act on the goods involved in the execution TOURBO LTD. & ORS. -... ( 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 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. [Para 16] [857 C-H] ~· Builders Association of India and Ors. v. Union of India and Ors. (1989) 73 STC 370 - relied on. 1. 3. 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 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 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. 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. 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. [Para 19] [858 E-H, 859 A] 2. After the impugned judgment, the Department has amended Rule 17 of the APVAT Rules, 2005 by Government Order dated 20. 8. 2007. It is now clarified that _,. , where a VAT dealer awards any part of the contract to ~ J registered sub-contractor, no tax shall be payable on the consideration paid for the sub-contract. Therefore, 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 'r finds place in sub-section 7(a) of s. 4 of the said 2005 Act. [Para 20] [859 8-D] Case Law Reference I;:- (1958) 9 STC 353 referred to Para 13 (1989) 73 STC 370 relied on Para 14 (1993) 88 src 204 ·referred to Para 15 CIVILAPPELLATE JURISDICTION: Civil Appeal No. 5239 of 2008 .. From the final Judgment and Order dated 12. 10. 2006 of the High Court of Andhra Pradesh at Hyderabad in Writ Petition No. 12124 of 2066 l Dhruv Agarwal, Manoj Saxena and T. V. George for the Appellants. ! Harish N. Salve, Sameer Parekh, Sanad Ramakrishnan, .. ,l.. Rukmini Bobde (for M/s. Parekh & Co. ), Bina Madhaven and Manish Kumar (for M/s. Lawyer's Knit & Co. ) to; the Respondents. The Judgment of the Court was delivered by 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 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 remc,:iined 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 subcontractors' 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, 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 Com-pany; that, the scheme of the said Act at the relevant time did not contemplate for the declaration of subcontractors' turnover and, that, under the scheme of the said 2005 Act the sub-contractor Nas 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 recompute the tax liability adopting a uniform rate of 12. 5% on the subcontractors' 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 assessmeqt order dated 31. 5. 06, for .. y the aforestated . period, the Company moved the Andhra Pradesh High Court ~ide 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-c~ntractor, by way of deemed sale as. well as the main contra~tor, by way of deemed sale as well as the main contractor should transfer ; ~he value of the property by way of deemed sales to the contractee. The principles whatsoever apply to a sale in generafsquarely 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. ft being so, there are two deemed sales one from main contractor to ~ contractee and the other frnm sub-contractor to the main .. contractor in the event ofcontractee not having any privity of contract with sub-contractor. " (ernphasis supplied by us) 7.

The question which needs con$ideration ·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 c1. 1ntractee and the other from the sub- ~ contractors to the main contractor as there was no privity of contract b~tween 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 _... ~.. ·- +- y way of composition subject to the condition that the subcontractor shall pay tax in respect of any goods purchased or received from outside the $tate of Andhra Pradesh or from any person other than a Value Added Tax dealer in the State on the Value of such goods at the rates applicable t0 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 ~his 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; J__ (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 invoic:;e issued by the sub--contractor $hall 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 tor execution of the works; (ii) Charges for planning, designing and architect's fees; 1-- " ' - (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 TOURBO LTD. & ORS. fS. H. KAPADIA, J. ] 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; (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;" 1O.

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 sa~ rr (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 subcontractors 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 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 ofMadras v. Mis. 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 ofan 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 ~lia, 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 ih the case of Mis 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) ofthe 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 Ill which deals with 'ihcidence, 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 g. oods 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 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 J. _ sub-contractor shall issue a tax invoice to the contractor for the value of the goods at the time of incorporation in such subcontract. The tax charged in the tax invoice issued by the subcontractorshall 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 subcontractor 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 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 At . ,. L&T to its sub-contractor(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 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 originalwritpetition) isto 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 ol! aw in this regard is clarified by this ).. - Court in the case· of Builder's~ Association of India (supra) as under: "Ordinarily unless there is a contract to the contrary in the case of works cohfract 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 t~e 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 iri 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 ofcontract between the contractee and the sub-contractor, ~ that would not do aw_ay 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 multipletransactions.

This reasoning is also borne '( out bySection 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 -1 366(29A)(b) of the Constitution as held by the impugned judgment ofthe High Court. Moreover, it may result in double taxation which may make the said 2005 Act vulnerable to challenge as violatiye 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. j... 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 f 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 subcontract 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. 0. 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. 0. to call for individual contract(s), tax invoice(s) arid call such particulars require to be submitted by the assessee before adding the turnover of the sub-contractor tb 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. D. G. Appeal dismissed. ~ r ; . \ ~ _. (_ 1-- I