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Works Contract under VAT

08 August 2009

A company awards a works contract to the contractor and issues some materials to the contractor on the following basis:

1. Material A is supplied to Works Contractor at cost and the cost of such materials is recovered by way of deductions from the contractors payment due.

2.Material B is supplied to contractor at a fixed rate irrespective of the cost to the Contractee and the cost at such fixed rate is recovered from the contractor.

Both the above materials are purchased by the Contractee for the sole purpose of supplying them to the Contractor for the Works Contract.

Now the question is will the above supply of materials to the Contractor amount to Sale/deemed sale by the Contractee under the West Bengal VAT Act. If so is the Contractee again liable to charge Vat from the Contractor. Please reply with reference to case laws (if any).

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4 Replies

Dilip (Working) (408 Points)
Replied 10 August 2009

work contract is not an sale but an deemed sale. In works contract contractor supplies the good along with contract of labour. In this case contractee himself has purchased from other buyer. so the case doesnt come under works contract. The goods transfered by contractee will not be included in cost of labour.

Pinkey Chowbey (ca) (64 Points)
Replied 11 August 2009

Originally posted by :Dilip
"	work contract is not an sale but an deemed sale. In works contract contractor supplies the good along with contract of labour. In this case contractee himself has purchased from other buyer. so the case doesnt come under works contract. The goods transfered by contractee will not be included in cost of labour.	"

Dear Dilip,

I think u have not understood my question. My question is not whether the goods transferred by the contractee will be included in the cost of labour or not. but instead whether the goods so transferred will tantamount to sales in the hands of the Contractee and thereby attract VAT. If that be so wether the Contractee is required to issue a Tax invoice and charge Vat from the Contractor for the goods supplied.

Regards,

Pinky

RAJU (LEARNER) (1089 Points)
Replied 11 August 2009

Hi Madam,

I think this is an issue which can be be soughted by an expert and we may have to go through the legal decisions on the matter.

I feel, the exigibility to tax depends on the work order (terms of contract) placed by the contractee. If issue of material by contractee to contractor and contractor utilising the material in the course of work are two different transactions, it is liable for VAT. If the value of materials are supplied by the contractee and are deducted from the total work value to be paid to the contractor, then probably it is liable since the property in goods are first passed on to the contractor and then from contractee to contractor during execution of work.

Whereas, if the work order do not show within the contract of work, the scope of supply, it may not be liable. The assumption here is that the property in goods do not pass from the contractee to contractor. The contractor merely does labour job in which case, no VAT.

Please also clarify us the factual position once you get clarified.

Regards/Dharmaraju