LARSEN & TOUBRO LIMITED VERSUS ADDITIONAL DY.COMMR.OF COMMRL.TAXES


INTRODUCTION

The main issue in the present case revolves around the concept of “turnover tax”. It is a tax on the total transactions which is usually applicable on all sales of various commodities. A turnover tax is similar to Value Added Tax (VAT) and differs in the point that it taxes intermediate capital goods. It is a form of indirect tax.

Under the Indian Tax System, there had been a “multi-point taxation system” which meant that tax would be levied at all the stages of the sale of any commodity. Tax is levied and collected at every point of sale whenever the goods are sold.

But in the of the Hon’ble Supreme Court in Larsen & Toubro Limited vs Additional Dy.Commr.Of ( September 2016) which struck down the multi-point levy of Turnover Tax on Works Contract. It was held by the Hon’ble court that while calculating the total turnover for Section 6-B of the Karnataka Sales Tax Act, the value of the work which is entrusted to the sub-contractors or the payments made to them shall not be taken into consideration.

Thus, the facts and issues involved along with the analysis of judgment would be discussed further in the present case analysis.

FACTS AND ISSUES

The facts of the case are often stated as:

The case is related to the provisions of the Karnataka Sales Tax Act, 1957 (hereinafter referred to as the 'Karnataka Act'), out which three appeals are arising- two appeals are preferred by the assessee, viz. Larsen & Toubro Ltd. and one appeal are filed by the Revenue, i.e. the Sales Tax Department of Karnataka.

The assessee is doing the business of engineers and contractors who executes projects under the contracts with government and private bodies and assigns a part of work to the sub-contractors [ in this case, M/s. Lloyd Insulation (India Limited) ]. The subcontractor, here, had already paid the taxes and so the assessee (appellant) is denying being taxed again on the same taxable event while the Assessing officer is including it under total turnover.

The main issues presented before the Hon’ble Court were as follows:-

1) Whether the taxable event being argued here are same under the transfer of property act and Section 6-B of the Karnataka Act?

2) Whether the assessee is liable to turnover tax as per Section 6-B of the Karnataka Act, on the payment made to the sub-contractor irrespective of the sub-contractor already bring declared the turnover and paid taxes?

3)  Whether the payment made to the sub-contractor does amount to turnover within Section 2 (i) (v) of the Karnataka Act?

4)  Whether such payment by the sub-contractor be part of total turnover as per Section 2(1) (u-2) of the Karnataka Act?

5) What is the liability of the assessee under Section 5-B and section 6-B of the Karnataka Act?

6) Whether a multi-point levy of turnover tax on works contracts be struck down?

Relevant statutory provisions involved:

1) Sections 2 (i) (v), 2 (i) (t), 2 (1) (u-2), 5-B, 6-B, 10 (1), 10 (2), 23 of Karnataka Sales Tax Act, 1957.

2) The clause (c) of sub-rule (1) of Rue-6 of the Karnataka sales tax Rules, 1957.

3) Article 366 (29A) (b) of the Constitution of India.

4) Section 4 (7) and 17 (1) (a) of the Andhra Pradesh Value Added Tax Act, 2005.

5) The Transfer of Property Act, 1882

APPELLANT’S ARGUMENT

● Appellant contended that the value of the work entrusted to the sub-contractor could not be taken into account while computing the total turnover of the assessee for taxation under the Karnataka Act.

● There is only one taxable event, as per the appellant, for the purpose of Article 366 (29A) of the Indian Constitution.

● Taking the help of the Andhra Pradesh Value-added Tax Act, 2005, the assessee asked for judgement in his favour.2

● Mr N. Venkatraman, learned senior counsel for the appellant/assessee, made a plea for not including payments made to the sub-contractor, as part of total turnover, because the sales tax is payable on the transfer of property and the 'turnover' also meant aggregate amount for which goods are bought, sold, etc.3

RESPONDENT’S ARGUMENT

● Respondent denied the contentions of the assessee (appellant) and said that the value of work entrusted to the subcontractor should be taken into account for calculating total turnover.

● It also negated the submission of the appellant that it constitutes only one taxable event.

● The Revenue was in appeal for allowing the revision petition of the assessee by the High Court.

● Respondent argued that the decision of the High Court should be maintained about Karnataka Act and the judgment of the Andhra Pradesh act should not be followed as it is materially different.

● Mr K.N. Bhat, learned senior counsel for the Revenue relied upon the reasoning of the High Court in the judgment in favour of the Revenue. He said there is 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. The value of the work entrusted to the sub-contractors should be includible at the hands of the assessee as per section 6 B. He further submitted that the sales tax should be levied at a single point, whereas turnover tax should be levied at multi-points, both at the hands of the main contractor and sub-contractor and, therefore, the question of double taxation doesn't arise.

JUDGEMENT

● The submission of the assessee was negative by the Karnataka Appellate Tribunal.

● The High Court affirmed the view taken by the Appellate Tribunal which dismissed the revision petition of the assessee through judgment dated February 03, 2006.

● The High Court had allowed the revision petition of the appellant.

● Thus, there are two sets of contrary judgments of the High Court.

● The Supreme Court held that the value of the work entrusted to the sub-contractors or the amount paid to them shall not be taken into consideration when calculating total turnover under Section 6-B of the Karnataka Act.

● Justice A.K. Sikri and Justice Rohinton Fali Narimanthe of the Hon’ble Supreme Court gave the judgment in this case. Hence, the two appeals filed by the assessee were allowed and the appeal preferred by the Revenue was dismissed. Considering the facts and circumstances of the case, no order as to costs was passed.

JUDGEMENT ANALYSIS

In this case, the Hon’ble Court observed and analysed the following points:

● Various provisions of the Karnataka Act were discussed such as:

a) The definition of “Sale” [ Section- 2 (i) (t) ] was discussed as the transfer for property in goods for consideration and includes – transfers in pursuance of a contract related to property and transfer of property in goods in the execution of a works contract.

b)  The definitions of “Taxable Turnover” [Section 2 (i) (u-1) ], “total turnover”, and “turnover” was discussed and the distinction between them was elaborated.

● The essential element to constitute any transaction as a “sale” is the transfer of the property in goods.

● Two variants of turnover are there known as 'taxable turnover' and 'total turnover'. 'Total turnover is the aggregate turnover in all the goods. However, certain deductions are permissible from this under the provisions of the Karnataka Act and which gives 'taxable turnover' on which a dealer needs to pay tax.

● Section 5-B of the Karnataka Act contains provisions for ‘Levy of tax on the transfer of property in goods and Section 6-B of the Karnataka act states about the levy of turnover tax.

● On a plain reading of Sections 5-B of the Karnataka Act is, thus, a special provision meant for imposing sales tax on the works contract and tax is payable on 'taxable turnover. Additionally, in the cases where the total turnover of a registered dealer in a year is not less than the turnover specified in sub-sections (1) and

(2) of Section 10, such a dealer is susceptible to pay tax at whatever rate specified in Section 6-B of the Karnataka Act.

●  The court held that the property in goods involved in the execution of a works contract pass on the theory of accretion based on the principle quicquid plantatur solo, solo cedit, which means 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 didn't undo the principle.4

● The total turnover of the dealer, shall include the total amount paid or may be payable to the dealer as part of the consideration for transfer of property in goods involved in the execution of works contract; and also includes any amount paid in as a part of such consideration.

● The value of the goods that 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.

● The question that whether the goods employed by the sub-contractors occur in the form of a single deemed sale or multiple deemed sales was also viewed by the court about Builders' Assn. of India as under (SCC p. 673, para 36) “36 … Ordinarily unless there's a contract to the contrary within the case of a works contract, the property in those goods which are 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.”

● The court stated that if the argument of the Department accepted then it would lead to a plurality of deemed sales contrary to Article 366(29-A)(b) of the Constitution the High Court held. Also, it may result in double taxation which makes the said 2005 Act vulnerable to challenges as violating the Articles 14, 19(1)(g) and 265 of the Constitution of India as also held by the High Court in its judgment.

● The work entrusted to the sub-contractors or the amount paid to them should not be taken into consideration when computing total turnover under Section 6-B of the Karnataka Act.

● Taking into consideration all the relevant provisions and cited cases, the court in this landmark judgment struck down the multi-point levy of turnover tax on works contracts.

CONCLUSION

In LARSEN & TOUBRO LIMITED VS ADDITIONAL DY.COMMR., the Supreme Court gave the important verdict on the point of levy of taxes on multiple points in terms of works contract and held that if the payment has been included at any one point then it cannot be taxed again if it forms the single and same event for assessment of both the taxes. Such assessee should not be maid to pay unnecessary tax on the part of the same transaction while calculating the turnover tax.

After the coming of GST in India which has been made effective from 1 July 2017, the tax structure has undergone a drastic change, where we can see many things related to multiple levels of taxation, etc. Judgments like this have shaped the structure of the Indian Taxation System and continue to be relevant.


Footnotes-

1 The author is a student of LLB, Faculty of Law, University of Delhi. [Authored on ( 6 July 2021)

2 State of Andhra Pradesh & Ors. v. Larsen & Toubro Limited & Ors., 26 August 2008.

3 The State of Madras v. Gannon Dunkerley & Co. (Madras) Limited, 1 April 1958

4 Builders' Association of India & Ors. v. Union of India & Ors., 31 March 1989.