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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2956 OF 2007

LARSEN & TOUBRO LIMITED .....APPELLANT(S)

VERSUS

ADDITIONAL DEPUTY COMMISSIONER OF COMMERCIAL TAXES & ANR. .....RESPONDENT(S)

W I T H

CIVIL APPEAL NO. 2318 OF 2013

A N D

CIVIL APPEAL NO. 7241 OF 2016

J U D G M E N T A.K. SIKRI, J.

Same parties are entangled in these three appeals which arise out

of  the  provisions  of  the  Karnataka  Sales  Tax  Act,  1957  (hereinafter

referred to as the 'Karnataka Act').  Two appeals are preferred by the

assessee,  viz.  Larsen  & Toubro Ltd.,  and one appeal  is  filed  by  the

Revenue, i.e. the Sales Tax Department of Karnataka.

2) The assessee is doing the business of engineers and contractors and in

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this process it,  inter alia, executes projects under contracts with public

sector  undertakings,  local  bodies as well  as the Union and the State

Governments, besides private sector.  The assessee is registered under

the  Karnataka  Act  and  files  its  returns  for  payment  of  sales  tax

thereunder.  The contracts which are secured by the assessee are the

works  contracts  and  a  part  thereof  is  generally  assigned  to

sub-contractors.   For example,  in Civil  Appeal No. 2956 of  2007, the

assessee had secured a contract to construct an indoor stadium styled

'Sree  Kanteerava  Indoor  Stadium' in  Bengaluru  and  the  assessee

assigned  the  work  of  finding  their  own  materials  and  laying  foam

concrete to M/s.  Lloyd Insulation (India Limited).   This sub-contractor

was  registered  with  the  Deputy  Commissioner  of  Commercial  Taxes,

Assessment-IX  City  Division,  Bengaluru,  and  accordingly  it  had

submitted returns and paid taxes for the execution of the works contract

and was duly assessed under Sections 5-B and 6-B of the Karnataka

Act.  A certificate dated April 10, 1998 to that effect had been marked

before the authorities.   

Likewise, returns are filed by the assessee as well on regular basis. In

the  course  of  the  assessment,  the  assessee  submitted  that  the

sub-contractors were the parties who executed the works contract and

since the transfer  of  property involved in  such execution had already

been taxed, the appellant cannot be taxed again under Section 6-B of

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the Karnataka Act there being only one taxable event for the purpose of

Article 366(29A)(b) of the Constitution of India.  In nutshell, it was the

submission  of  the  assessee  that  value  of  the  work  entrusted  to  the

sub-contractor  could  not  be  taken into  account  while  computing  total

turnover of the assessee for the purpose of taxation under the Karnataka

Act.  This submission of the assessee was, however, negatived by the

Assessing Officer as well as the Karnataka Appellate Tribunal.  In the

revision filed under Section 23 of the Karnataka Act, the appellant raised

the following questions:

(i)  Is the assessee liable to turnover tax under Section 6-B of the Karnataka

Sales Tax Act, 1957 on the payment made to the sub-contractor in spite

of the fact that the sub-contractor had declared the turnover and paid

taxes?

(ii)   Since  the  payment  made  to  the  sub-contractor  does  not  amount  to

turnover within Section 2(i)(v) of the Karnataka Sales Tax Act, 1957, can

such payment be part of total turnover as per Section 2(1)(u-2) of the

Karnataka Sales Tax Act, 1957?

The High Court decided the aforesaid questions against the assessee

and thereby affirmed the  view taken by  the Appellate  Tribunal  which

resulted in dismissing the revision petition of the assessee vide judgment

dated  February  03,  2006.   This  judgment  is  the  subject  matter  of

challenge  in  Civil  Appeal  No.  2956  of  2007,  which  pertains  to  the

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Assessment Year 1997-1998.

3) Likewise, for the Assessment Year 2002-2003 (Civil Appeal No. 2318 of

2013), the assessee has been meted out the same treatment whereby

the work awarded to the sub-contractors, who are the registered dealers

and have paid sales tax in respect of the works undertaken by them, has

been added in the total  turnover of the assessee for the purposes of

levying tax.  However, here the matter is remanded to the Assessing

Officer for ascertaining the liability of the assessee under Section 5-B as

well as Section 6-B of the Karnataka Act in respect of total turnover of

the assessee.

4) On  the  other  hand,  outcome  of  the  proceedings  in  respect  of  the

Assessment Year 1999-2000 (Civil Appeal No. 7241 of 2016) has taken

a U-turn.  For this Assessment Year, though the Assessing Officer as

well as the Appellate Tribunal had included the cost of work awarded to

the  sub-contractors,  the  High  Court  has  held  that  value  of  the  work

awarded to the sub-contractors cannot be included for  computing the

total turnover of the assessee and has, thus, allowed the revision petition

preferred by the assessee. Against that order, the Revenue is in appeal.

5) The aforesaid brief resume of the three appeals makes it clear that the

question of law involved in all these three cases is the same, though the

two sets of judgments of the High Court are contrary to each other.

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6) It may be pointed out at this juncture itself that in the case of this very

assessee  same  question  of  law  had  arisen,  albeit  in  the  context  of

Andhra Pradesh Value Added Tax Act, 2005 (hereinafter referred to as

the  'Andhra  Pradesh  Act').   This  Court  has  decided  the  issue  in  its

judgment  known as  State  of  Andhra  Pradesh  &  Ors.  v.  Larsen  &

Toubro Limited & Ors.1 (hereinafter  referred to  as 'Andhra Pradesh

judgment').  The question of law is answered in favour of the assessee.

Taking  aid  of  the  said  judgment,  the  assessee  has  argued  that  the

instant appeals should be decided in its favour.  On the other hand, plea

of the Revenue is that that view taken by the High Court, which is in

favour of the Revenue, is the correct view and should be maintained

having regard to the provisions of the Karnataka Act.  The endeavour of

the Revenue is to demonstrate that the provisions of the Andhra Pradesh

Act are materially different than that of the Karnataka Act and, therefore,

the judgment in the Andhra Pradesh case need not be followed.

Before adverting to the aforesaid judgment  of  this Court,  it  would be

advisable to take note of the various provisions of the Karnataka Act.

7) For our purposes, definitions of  'sale',  'taxable turnover',  'total turnover'

and 'turnover' are material, which are reproduced below:

“2(i)(t)   “Sale”  with  all  its  grammatical  variation  and cognate expressions means every transfer of the property in goods (other than by way of a mortgage, hypothecation,

1 (2008) 9 SCC 191

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charge or plede) by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration, and includes, –  

(i)   a  transfer  otherwise  than  in  pursuance  of  a contract of property in any goods for cash, deferred payment or other valuable consideration;

(ii)  a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

xx xx xx   2(i)(u-1)  “Taxable turnover” means the turnover on which a  dealer  shall  be  liable  to  pay  tax  as  determined  after making such deductions from his total turnover and in such manner as may be prescribed, but shall  not  include the turnover of purchase or sale in the course of inter-State 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 gods into the territory of India;

(u-2)  “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  inter-State  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;

(v)   “Turnover”  means  the  aggregate  amount  for  which goods  are  bought  or  sold,  or  supplied  or  distributed  or delivered  or  otherwise  disposed  of  in  any  of  the  ways referred  to  in  clause  (t)  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.”

8) Since  we  are  dealing  with  the  sales  tax  under  the  Karnataka  Act,

obviously the said tax is on  'sale'.  'Sale'  is defined as transfer of the

property in goods by one person to another in the course of trade or

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business  for  consideration  and  it,  inter  alia,  includes  a  transfer  of

property in goods (whether as goods or in some other form) involved in

the  execution  of  a  works  contract.   Thus,  even  in  respect  of  works

contract  whenever  there  is  a  transfer  of  property  in  goods,  that  is

deemed as 'sale'.   

9) An essential element to constitute a transaction as 'sale' is the transfer of

property in goods.  Aggregate amount for which the goods are bought or

sold, or supplied or distributed or delivered or otherwise disposed of, in

any of the ways referred to under Section 2(t), by a dealer is treated as

'turnover' within the meaning of Section 2(v) of the Karnataka Act.  There

are two variants of this turnover known as  'taxable turnover'  and  'total

turnover', the definitions whereof are already reproduced above.  'Total

turnover' is defined as aggregate turnover in all goods of a dealer at all

places of business in the State.  However, from this aggregate turnover,

certain deductions are permissible under the provisions of the Karnataka

Act and when those deductions are allowed from the total turnover, we

get 'taxable turnover' on which a dealer is liable to pay tax.

10) Section 5-B of the Karnataka Act is the charging section in respect of

execution of the works contract and it reads as under:

“5-B   Levy  of  tax  on  transfer  of  property  in  goods (whether as goods or in some other form) involved in the  execution  of  works  contracts  –   Notwithstanding anything contained in sub-section (1) or sub-section (3) or sub-section (3-C) of Section 5, but subject to sub-section (4), (5) or (6) of the said section, every dealer shall pay for

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each year, a tax under this act on his taxable turnover of transfer of property in goods (whether as goods or in some other  form)  involved  in  the  execution  of  works  contract mentioned in column (2) of the Sixth Schedule at the rates specified in the corresponding entries in column (3) of the said Schedule.”

11) There is a levy of turnover tax as well, which is provided under Section

6-B of the Karnataka Act.  At the relevant time, this provision was in the

following form:

“6-B  Levy of Turnover Tax. – (1) Every registered dealer and every  dealer  who is  liable to  get  himself  registered under sub-section (1) and (2) of  Section 10 whose total turnover in a year is not less than the turnovers specified in the said sub-sections, whether or not the whole or any portion of  such turnover is liable to tax under any other provisions of this Act, shall be liable to pay tax. –  

(i)   at the rate of one and half  per cent of the total turnover, if  the  total  turnover  is  not  more  than one thousand lakh rupees in a year; or

(ii)  at the rate of three per cent of the total turnover, if the  total  turnover  is  more  than  one  thousand  lakh rupees in a year;

Provided that the rate of tax payable for any year shall be at  one  and  half  per  cent  on  the  turnovers  up  to  one thousand  lakh  rupees  and  at  three  per  cent  on  the turnovers exceeding one thousand lakh rupees, if, the total turnover in the year immediately preceding that year was not more than one thousand lakh rupees.”

12) On a plain reading of Sections 5-B and 6-B of the Karnataka Act, it can

be seen that Section 5-B deals with levy of tax on transfer of property in

goods involved in  the execution of  the works contract.   It  is,  thus,  a

special provision made for imposing sales tax on works contract and tax

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is  payable  on  'taxable  turnover  of  transfer  of  property  in  goods'.

Additionally, in those cases where total turnover of a registered dealer in

an year is not less than the turnover specified in sub-sections (1) and (2)

of Section 10, such a dealer is liable to pay tax at the rate specified in

Section 6-B of the Karnataka Act.

13) The question for  determination is:  for  calculating the turnover  for  the

purpose of payment of turnover tax under Section 6-B of the Karnataka

Act, whether payments made to sub-contractor are to be included while

calculating the total turnover?

14) Mr.  N.  Venkatraman,  learned  senior  counsel  appearing  for  the

appellant/assessee,  made  a  fervent  plea  for  not  including  such

payments made to the sub-contractor, as component of total turnover,

because of the reason that the sales tax is payable on the transfer of

property  and  the  'turnover'  also  meant  aggregate  amount  for  which

goods are bought or sold, etc.  Therefore, transfer of property in goods

was the necessary concomitant in ascertaining the sale and, thus, in the

process calculating the turnover/total  turnover.  It  was submitted that

there was no sale of goods involved in the execution of a works contract

as in such contracts the property does not pass as movables.  Tracing

the history of works contract, the learned senior counsel submitted that

in  the  case  of  The  State  of  Madras  v.  Gannon  Dunkerley  &  Co.

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(Madras) Limited2, while speaking of a building contract, this Court held

that the property in goods involved in the execution of a works contract

does  not  pass  as  movables  but  on  the  theory  of  accretion  on  the

principle quicquid plantatur solo, solo cedit, i.e. whatever is attached to

the soil, becomes part of it.  The Constitution (Forth-Sixth Amendment)

Act,  1982  inserted  Article  366(29-A)(b)  to  neutralise  the  judgment  in

Gannon Dunkerley & Co. only to the extent that an indivisble contract

was deemed to be divisible and did not undo the principle.  He argued

that  this  Court,  interpreting  Article  366(29-A)(b)  in  Builders'

Association of India & Ors. v. Union of India & Ors.3, reiterated that in

a works contract property in goods passes out as movable but on the

theory of accretion.  It was further submitted that the property passes by

accession just once which, by a fiction, is taxed as a sale.  The Article

also identifies the transferor and transferee effecting the deemed sale

and deemed purchase.  The taxable person is the contractor executing

the works contract so that the main contractor, who assigns the work to

another  person to execute the work,  cannot  be a transferor, nor  any

property  in  goods  vest  in  the  main  contractor,  when  the  contract  is

executed by a sub-contractor.

15) Proceeding further,  by taking the aforesaid line of argument, the learned

senior  counsel  submitted  that  if  the  point  of  view of  the  Revenue is

2 AIR 1958 SC 560 3 (1989) 2 SCC 645

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accepted,  it  would  amount  to  double  taxation  inasmuch  as

sub-contractors  were also registered dealers  who had paid  sales tax

under the Karnataka Act and by including the payments made to them in

the total turnover of the assessee, tax was sought to be levied on the

same amount  all  over  again.   On the aforesaid premise,  the learned

senior counsel for the assessee submitted that precisely this argument in

law has been accepted by this Court in the Andhra Pradesh judgment.

He referred to the discussion contained in the said judgment in extenso.

16) Mr. K.N. Bhat, learned senior counsel appearing for the Revenue, per

contra, heavily relied upon the reasoning given by the High Court in the

judgment  which  has  taken  the  view  in  favour  of  the  Revenue.   He

submitted that one had to keep in mind the distinction between Section

5-B and Section 6-B of the Karnataka Act by pointing out that when it

comes to levy of turnover tax, it speaks of  'total turnover',  whereas tax

payable under Section 5-B is on the  'taxable turnover'.  He submitted

that since we are concerned with the levy of tax under Section 6-B of the

Karnataka Act, total turnover becomes relevant and, therefore, the value

of the work entrusted to the sub-contractors is includible at the hands of

the assessee.  He further submitted that  the High Court  was right  in

pointing out that sales tax is leviable at a single point, whereas turnover

tax is leviable at a multi-point, both at the hands of the main contractor

and sub-contractor and, therefore, the question of double taxation does

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not arise.

17) After bestowing our due consideration to the respective submissions, we

find  that  the  position  taken  by  the  assessee  has  to  prevail,  which

appears  to  be  meritorious.   This  result  follows  even  from  the  bare

perusal of the Karnataka Act and Rules.  For this purpose, it becomes

important to refer to clause (c) of sub-Rule (1) of Rule 6 of the Karnataka

Sales Tax Rules,  1957.  Rule 6 deals with determination of total  and

taxable turnover and clause (c) reads as under:

“6.  Determination of total and taxable turnover. –  (1) The total turnover of a dealer, for the purposes of the Act, shall be the aggregate of. –  

xx xx xx

(c)  the total amount paid or payable to the dealer as the consideration for transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract; and includes any amount paid as advance to the dealer as a part of such consideration.

xx xx xx”

18) What  is  significant  is  that  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

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included in the total turnover.  The amount paid to the sub-contractor is

not for transfer of property in goods.  When matter is examined from this

angle, the ratio laid down by this Court in the Andhra Pradesh judgment

clearly  applies  inasmuch as in  that  case also the Court  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.  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.

19) 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 equipments 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.  In  this  backdrop, after

taking note of some provisions of  the Andhra Pradesh Act,  the Court

explained the legal position in the following manner:

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“16.  By virtue of Article 366(29-A)(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(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 L&T to its sub-contractor(s), L&T ceases to execute the works contract in the sense contemplated by Article 366(29-A)(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 us is whether the turnover  of  the  sub-contractors  (whose  names  are  also given in  the original  writ  petition)  is  to 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 of law in this regard is clarified by this Court in Builders' Assn. of India  as under: (SCC p. 673, para 36)

“36 … Ordinarily  unless  there  is  a  contract  to  the contrary in the case of a works contract, 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 the contractee  and  the  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 in mind the abovequoted observation of this Court in Builders' Assn. of India the position becomes clear, namely, that even if  there is no privity of  contract between the contractee and the sub-contractor, that would not do away with 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 multiple  transactions.  This

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reasoning is also borne out by Section 4(7) which refers to the 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  366(29-A)(b)  of  the Constitution as held by the impugned judgment of the High Court.  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  as  held  by  the  High  Court  in  its  impugned judgment.”

This raison d'etre shall apply, in full force, while answering the question

even in the context of the Karn5ataka Act.  

20) We,  therefore,  hold  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 Act.  As a consequence, the two appeals which are

filed  by  the  assessee  are  allowed  and  the  appeal  preferred  by  the

Revenue is dismissed.  In the facts and circumstances of the case, there

shall be no order as to costs.

.............................................J. (A.K. SIKRI)

.............................................J. (ROHINTON FALI NARIMAN)

NEW DELHI; SEPTEMBER 05, 2016.

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