In works contracts, between contractor and sub-contractors only one is liable to pay tax
When works contract is sub-contracted there is only one taxable event and between main contractors and sub-contractor only one is liable to pay tax on the goods incorporated in the works contract. Here below this issue is discussed in the light of decision of Supreme Court and P&H High Court in the context of VAT provisions especially under Punjab VAT Act, 2005.
Definition of works contract: As per Section 2 (za) of Punjab Value Added Tax Act “works contract” includes any agreement for carrying out, for cash, deferred payment or other valuable consideration, building ,construction, manufacturing, processing, fabrication, erection, installation, fitting out, improvement, modification, repairs or commissioning of any movable or immovable property.
Liability to pay tax: As per Section 8(2-A) of Punjab VAT Act every person 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.
Provided that where accounts are not maintained to determine the correct value of goods at the time of incorporation, such person shall pay tax at the rate of twelve and half percent on the total consideration received or receivable, subject to such deductions, as may be prescribed.
Who is liable to pay tax, contractor or sub-contractor: It can be seen from the definition that essentially a works contract is an agreement between two parties. In a works contract, the contractor promises to carry out some obligations like the construction of a building, fabrication of machinery, etc., in consideration of the employer promising to pay a certain amount either in cash or in the form of some other valuable consideration.
Similarly, when the contractor awards either wholly or partially, the contractual obligation to a sub-contractor there is another agreement between the contractor and the sub-contractor which is pro tanto identical in nature with the agreement between the employer and the contractor. Therefore, there are two works contracts in existence between the three parties mentioned above for the carrying out of one and the same task.
The question now arises whether there is one taxable event or two taxable events involved for vat purposes in the works contract executed by sub-contractor. For example if A (the main contractor) sub contracts the whole of his works contract of building construction to B then in such case who will be liable to pay tax on the goods incorporated in works contract whether A or B or both, the answer to this question depends upon whether there are two taxable events or one taxable event in the execution works contract.
As per section 8(2-A) the taxable event in works contract arises when a person executing works contract incorporates the goods in such works contract. Thus its only the person executing the works contract is liable to pay tax whether he is a sub contractor or a contractor. Hence If a part or whole of works contract of construction is sub-contracted then on that much taxable turnover involved in the such sub contracted works contract only one person will be liable to pay tax i.e. either contractor or the sub-contractor.
It must be noticed that there is no agreement between the employer and the sub-contractor and consequently there is no legal relationship creating either rights or obligations between them under an agreement. In between the employer and the sub-contractor the relationship is simply that the sub-contractor is an agent of the contractor.
Supreme court in Larsen & Toubro Limited and another Vs. State of Andhra Pradesh and others  146 STC 616 explained that by virtue of article 366(29A)(b) of the Constitution of India, once the work was assigned by the contractor the only transfer of property in goods would be by the sub-contractor, who was registered dealer, and who claimed to have paid the taxes under the Act on the goods involved in the execution of works. Once the work was assigned by the assessee to the sub-contractor, the assessee(Contractor) ceased to execute the works contract in the sense contemplated by article 366(29A) (b) because the property passed by accretion and there was no property in the goods with the contractor which was capable of re-transfer, whether as goods or in some other form. Thus in such a case the work executed by the sub-contractor resulted only in a single transaction and not multiple transactions.
The sub-contractor is only an agent of the contractor and the property in goods passes directly from the sub-contractor to the employer and therefore there can only be one sale which is recognised by the legal fiction created under Sub-article (29A) of Article 366. It therefore leads to the conclusion that there is only one taxable event of sale of goods in such a transaction.
It was further observed by SC that wherever a contractor executes a works contract himself without employing the sub-contractor the deemed sale of goods involved in such execution of works contract would attract the tax only once and whenever the contractor employs a sub-contractor, the transfer of property in the same goods involved in the execution of such works contract attracts the tax twice over, which in our view is plainly irrational and violation of Article 14 of the Constitution of India.
Thus one thing is very much clear from the above decision of SC, if the sub-contractor has been paying tax on the turnover of goods involved in works contract then contractor would not be liable to pay tax on such turnover on which the sub-contractor has already pad tax as there is only one deemed sales in this case.
Punjab & Haryana High court in an earlier case namely DLF Industries Limited Vs. State of Haryana and Another  120 STC 569 Punjab and Haryana High Court has held that works executed by sub contractor is the part of the main works contract and the main contractor will be liable to pay tax on the whole of the works contract whether executed by the contractor himself or through the sub-contractor and sub-contractor will not be liable to pay tax on the works executed by him. Ultimately the P&H HC also held that there is only one sale(taxable event) involved in the whole works contract whenever the contract is given to sub-contractor. The tax will be payable only at one stage i.e. at the time when goods are incorporated in the works contract and in this case P&H HC held that it’s the main contractor who will be liable to pay tax.
Brief facts of this case were that the petitioner was a public limited company incorporated under the Companies Act, 1956. M/s. DLF Universal Limited is the holding company of the petitioner-company. The said holding company was engaged in the work of colonization in the State of Haryana and carried out works contracts. Major part of the work was done by the holding company by entering into contracts with the petitioner-company. The holding company thus became the contractee and the petitioner-company became the contractor. The petitioner-company, in turn, executed some work itself and some work was got done through the sub-contractor. Material used in the work was arranged by the sub-contractor. Assessing authority, while framing assessment included, in the gross turnover of the petitioner-company, the value of the goods used by the sub-contractors.
Petitioner argued that property in goods used by the sub-contractor passed on directly from the sub-contractor to the principal, i.e., contractee, and there was no sale by contractor (petitioner) to contractee (holding company) in a works contract. There was only one sale, whether the work was done by a contractor himself or through a sub-contractor. Liability to pay tax on the sale would arise at one stage when the sale took place.
Punjab and Haryana High Court held that where a sub-contract is given by a contractor executing a works contract, there is no privity of contract between the contractee and the subcontractor. Part of the contract may be given for the purpose of execution to a sub-contractor but that would not absolve the contractor of his liability to pay tax. A sub-contract is a part of the works contract and is not an independent contract by itself. Therefore, a sub-contractor cannot be said to be liable to the contractee inasmuch as he has undertaken the execution of part of the works contract not from the contractee but from the contractor. In such a situation, the sub-contractor cannot be assessed on the value of goods used in the works done by him. Clause (ba) of Section 2 of the Act included within its ambit a sub-contractor engaged for executing the whole or part thereof. A sub-contractor is, therefore not required to pay tax as an independent dealer. The Assessing Authority included the turnover of the work done by the sub-contractor in the turnover of the petitioner-company. The first proviso to Section 6(1) of the Act excludes a dealer who executes a sub-contract inasmuch as sub-contract is a part of the works contract.
Thus it was finally held that a sub-contractor executes works contract on behalf of the main contractor and cannot be said to be working independently. There is only one sale where work is done by the contractor himself or through a sub-contractor and, therefore, contractor is to pay tax on the whole works contract and the sub-contractor will not be liable to pay tax.
Conclusion: From the perusal of the above said judgements of Supreme Court and High court it can be concluded that whenever a works contract is sub-contracted there is only one sale involved in it and only the one person will be liable to pay tax on the goods involved. As per the decision of P&H HC as above it’s the contractor who will be liable to pay tax and not the sub-contractor.
But If the sub-contractor has been paying tax on the turnover of goods involved in works contract then contractor would not be liable to pay tax on such turnover on which the sub-contractor has already pad tax as there is only one deemed sales in this case.
Amit Bajaj Advocate
Bajaj & Bajaj Advocates, Jalandhar