L&T Case: SC Strikes Down Multi-point Levy of Turnover Tax on Works Contract [Read Judgment]

The Supreme Court in Larsen & Toubro Limited Vs. Additional Deputy Commissioner Of Commercial Taxes & Anr. has held that the value of the work entrusted to the sub-contractors or payments made to them shall not be taken into consideration while computing total turnover for the purposes of Section 6-B of the Karnataka Sales Tax Act.

The apex court Bench comprising Justice A.K. Sikri and Justice R.F. Nariman set aside a Karnataka High Court judgment allowing the appeal against it by the assessee.

The Bench observed: "What is significant is that the total amount paid or payable to the dealer as a consideration for 'transfer of property in goods', which is involved in execution of the works contract, is to be treated as 'total turnover'. This Rule, thus, specifically restricts the total turnover in respect of those goods, alone, where the property has been transferred. Thus, transfer of property in goods, becomes necessary event and unless there is a transfer of property, the amount paid is not to be included in the total turnover. The amount paid to the sub-contractor is not for transfer of property in goods.”

The Court further observed that the ratio laid down in State of Andhra Pradesh & Ors. v. Larsen & Toubro Limited & Ors. applies in this case as much as it was in that case. It was noticed that Section 4(7) of the Andhra Pradesh Act indicated 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.

Referring to the said judgment, the Bench said: “The court held that the value of the goods which constitute the measure for the levy of tax is the value of goods at the time of the incorporation of the goods in the works. The court further found that same was the position contained in Rule 17(1)(a) of the Andhra Pradesh Value Added Tax Rules, 2005. It is not in dispute that the facts and the issue involved were identical, i.e. the assessee had assigned parts of the construction work to sub-contractors who were registered dealers. These sub-contractors had purchased goods and chattels like bricks, cement and steel and, where necessary, supply and erect equipment such as lifts, hoists, etc. The materials were brought to the site and they remain the property of the sub-contractor. The site was occupied by the sub-contractor and the materials were erected by the sub-contractor.”

Read the Judgment here.