Supreme Court: Turnover of Sub-Contractor to be ducted from Main Contractor's VAT Turnover for Avoidance of Double Taxation

The Hon'ble Supreme Court in the case of Authority for Clarification and Advance Rulings, Gandhinagar, Karnataka &Anr. v. M/s Skyline Construction and Housing Pvt. Ltd. [Civil Appeal No. 8318 of 2011, order dated October 09, 2025] held that principal contractors, under Section 15 of the Karnataka VAT Act, 2003 for the period prior to March 1, 2006, are entitled to deduct amounts paid to registered sub-contractors from their total consideration for works contracts, when computing tax liability under the composition scheme, provided such sub-contractors have accounted for and paid tax on those amounts.

Facts:

M/s Skyline Construction and Housing Pvt. Ltd. ('the Appellant') was a registered dealer engaged in works contracts, part of which were executed through sub-contractors. The Appellant sought an advance ruling whether payments made to sub-contractors should be included in its taxable consideration for VAT purposes under Section 15(1), given no express deduction provision, then existed.

Authority for Clarification and Advance Rulings, Gandhinagar, Karnataka &Anr. ('the Respondent') held that, absent an express provision till March 31, 2006, no such deduction was admissible.

The Appellant contended that taxing both main and sub-contractor on the same value would lead to double taxation; consideration paid for work actually executed by registered sub-contractors, who discharge VAT, should be deductible.

The Respondent contended that Section 15 and the composition scheme did not allow deduction for sub-contractor payments prior to amendment; all consideration received by the principal contractor should be taxed.

Aggrieved by this, the Appellant challenged the ruling before the High Court, which allowed the deduction, and the matter reached the Supreme Court in appeal by the revenue.

Issue:

Whether, under Section 15 of the KVAT Act, 2003 for the period prior to March 1, 2006, principal contractors could deduct amounts paid to registered sub-contractors from the total consideration received for execution of works contracts while computing VAT liability under the composition scheme?

Held:

The Hon'ble Supreme Court in Civil Appeal No. 8318 of 2011 held as under:

· Observed that, "the payment made to the sub-contractors is required to be deducted for determining taxable value for the purpose of calculating tax under Section 15(1) of the VAT Act is in accordance with law."

· Noted that "to the extent the contract was executed through sub-contractors, it cannot be said that the works contract was executed by the main contractor. Hence the total consideration for works contract executed by the main contractor can be derived only if the payments made to the sub-contractors are reduced."

· Noted that, any other view would result in double taxation, as sub-contractors were individually liable for VAT on their executed work and received consideration.

· Noted the High Court's reasoning is "absolutely in consonance with the judgment of this Court in State of Andhra Pradesh v. Larsen & Toubro & Others[(2008) 17 VST 1 (SC)] which explained that in a works contract, sales occur only by accretion, and tax is payable by the person (main or sub-contractor) executing the works.

· Noted that, the case of State of Kerala v. Builders Association of India [(1997) 2 SCC 183] as being inapplicable, as it pertained to the validity of lump sum composition schemes, not the present interpretative question.

· Dismissed the appeal and affirmed the High Court order allowing deduction of payments made to registered sub-contractors for calculating the main contractor's turnover under Section 15(1) and clarified that deduction is permissible only for registered dealers who have actually paid tax on the sub-contracted work.

Our Comments:

The Supreme Court judgment closely follows its earlier holding in the case of State of Andhra Pradesh v. Larsen & Toubro & Others [2008 (17) VST], which clarified the principle that VAT liability attaches to accretion and that sub-contracts do not create multiple taxable events for the same turnover. In Larsen & Toubro, the Court held that in execution of works contract, sales take place on the principle of accretion-meaning that the actual sale of goods takes place directly from the sub-contractor to the contractee, even if the contract is made between the main contractor and the contractee, and regardless of whether the sub-contractor has a direct contractual relationship with the contractee.

The Court rejected the State's reliance on State of Kerala &Anr. v. Builders Association of India & Ors. [(1997) 2 SCC 183], distinguishing that case's context and finding it not relevant to computation of turnover under composition schemes. In Builders Association, the Court dealt with the constitutional validity of lump sum composition schemes under the VAT Act. The judgment upheld the scheme as a permissible optional method for computing tax liability, but it did not deal with the issue of deductibility of payments to sub-contractors from the main contractor's turnover. Skyline clarifies that the issue here is one of interpretation of turnover and composition liability under Section 15 of the Karnataka VAT Act, and the Builders Association principle is not applicable to the deductibility question.

Relevant Provisions:

Section 2(35) of the Karnataka Value Added Tax Act, 2003

"35. 'Total turnover' means the aggregate turnover in all goods of a dealer at all places of business in the State, whether or not the whole or any portion of such turnover is liable to tax, including the turnover of purchase or sale in the course of interstate trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India and the value of goods transferred or despatched outside the State otherwise than by way of sale."

Section 2(36)of the Karnataka Value Added Tax Act, 2003

"36. 'Turnover' means the aggregate amount for which goods are sold or distributed or delivered or otherwise disposed of in any of the ways referred to in clause (29) by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration, and includes the aggregate amount for which goods are purchased from a person not registered under the Act and the value of goods transferred or despatched outside the State otherwise than by way of sale, and subject to such conditions and restrictions as may be prescribed the amount for which goods are sold shall include any sums charged for anything done by the dealer in respect of the goods sold at the time of or before the delivery thereof.

Explanation.- The value of the goods transferred or despatched outside the State otherwise than by way of sale, shall be the amount for which the goods are ordinarily sold by the dealer or the prevailing market price of such goods where the dealer does not ordinarily sell the goods."

Section 2(37)of the Karnataka Value Added Tax Act, 2003

"37. 'Works contract' includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property."

Section 3of the Karnataka Value Added Tax Act, 2003

"3. Levy of tax.-

(1) The tax shall be levied on every sale of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of this Act.

(2) The tax shall also be levied, and paid by every registered dealer or a dealer liable to be registered, on the sale of taxable goods to him, for use in the course of his business, by a person who is not registered under this Act."

Section 15 of the Karnataka Value Added Tax Act, 2003

"15. Composition of tax.- (1) Subject to such conditions and in such circumstances as may be prescribed, any dealer other than a dealer who purchases or obtains goods from outside the State or from outside the territory of India, liable to pay tax as specified in Section 4 and,

(a) whose total turnover in a year does not exceed an amount as may be notified by the State Government which shall not exceed fifty lakh rupees, and who is not a dealer falling under clause (b) or (c) or (d) below;

(b) who is a dealer executing works contracts; or

(c) who is a hotelier, restaurateur, caterer; or dealer running a sweetmeat stall or an ice cream parlour or bakery or any other class of dealers as may be notified by the Government.

(d) who is a mechanised crushing unit producing granite or any other metals; may elect to pay in lieu of the net amount of tax payable by him under this Act by way of composition, an amount at such rate not exceeding five per cent on his total turnover or on the total consideration for the works contracts executed or not exceeding two lakh rupees for each crushing machine per annum as may be notified by the Government as may be prescribed."

OFFICIAL JUDGMENT COPY HAS BEEN ATTACHED