TMI Blog2012 (7) TMI 671X X X X Extracts X X X X X X X X Extracts X X X X ..... ain contractor leads to multiple taxation - Held that:- The net tax liability remains the same. Furthermore, once such a tax is paid by the contractor, sub-contractor can always claim that tax stand paid at the hands of the contractor and, therefore, sub-contractor is not liable to make the payment all over again. To ensure this, the contractor like the petitioner while making payment to the sub-contractor can recover the tax from those payments and issue TDS Certificate on the basis of which sub-contractor can always claim credit, thus no point of double taxation. Once it is concluded that there is no basis for apprehension that mechanism provided under the DVAT Act and Rules can lead to double taxation it is advisable to agree with the contention of the learned ASG that the manner in which deduction and exemptions are to be granted is the legislative prerogative - the edifice of the petitioner's case questioning the validity of the impugned provision is built on the so called adverse consequences which may follow in the absence of deduction mechanism of sub-contractor turnover. On the basis of so called difficulties, a particular provision of a statute cannot be invalidated - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese petitions, common issues have been raised. Precisely for this reason all these petitions were heard together and can conveniently be disposed of by a common judgment with which we are proceeding hereunder. 3. A gist of various petitions narrated herein above would disclose that primarily two issues arise for consideration namely; ( i ) Vires of Section 5 (2) of the DVAT Act, 2004 and Rule 3 (2) of the DVAT Rules, 2005 which is challenged as unconstitutional, essentially on the ground that it does not provide for a proper mechanism to compute the taxable turnover after deducting 'turnover of sub contractors' and does not conform to the law laid down by the Supreme Court in the judgment titled State of Andhra Pradesh v. Larsen Toubro Ltd. [2008] 16 STT 501 ( ii ) Validity of the impugned orders passed by the respondent no.3 which is questioned on the premise that have been passed in gross violation of the principles of natural justice inasmuch as respondent no.3 had neither issued notice nor afforded an opportunity of hearing in deciding the exemption and exclusion on labour and service charges, incurred by the petitioner in execution of the works contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fically mentioned that if the petitioner failed to do so, it would be presumed that the petitioner was not interested in submitting the documents and was deliberately avoiding. The petitioner was put to notice that in such an eventuality, the ex parte penalty assessment i.e. best judgment assessment would be made. It was also stated that no further opportunity shall be given. The petitioner was also put to notice that as per Section 88 (14) of the DVAT Act penalty could also be attracted. ( d ) It is an admitted fact that even thereafter the information as required by the respondent no.3 was not furnished on the dates fixed. The representative of the petitioner appeared on those dates and the proceedings were recorded in the daily order sheets. The order sheet dated 30.1.2012 records the appearance of the advocate of the petitioner. It is further mentioned that default notice had already been issued on the basis as AGCR order passed and since there was mistake apparent on record, a suo moto rectification order was required. In the circumstances, following recording was made in the said order sheet:- "Further on going through the sale - purchase summary / returns of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, were dismissed vide impugned order dated 6.3.2012 which were passed in the presence of counsel for the petitioner. 5. The reasons stated in this order disclosed that as per Rule 3(2) where the amount of charges towards labour, service and other like charges are not ascertainable from the books of accounts of the dealer, the amount of such charges shall be calculated, at the rate of 25% of the total value of contract in respect of civil work. But in the original default assessment, 25% was allowed on labour, service and other like charges. This was, according to the adjudicating authority, a mistake apparent on the face of the record and to this extent, the rectification was allowed. 6. However, on the other aspect, the impugned order went on to say that on scrutiny of returns/sale purchase summary, it is found that the dealer got the contract and used the material in the execution of works contract in Delhi. Dealer has claimed sub-contractor's turnover deduction from the taxable turnover as the TDS @ 2% deducted by the dealer. This contention of the dealer is not accepted as this deduction is not allowed under Rule 3 of DVAT Rules, 2005, and also keeping in view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperty in goods as "Chattle Qua Chattle" and would not cover within its ambit, sale of goods in an indivisible works contract. The Constitutional Bench clearly held that a divisible contract of sale and service can be taxed on the 'sale' portion whereas an indivisible works contract cannot be taxed as 'sale'. This necessitated the 46th Constitutional Amendment wherein a new sub-article 29A was introduced to Article 366 of the Constitution. Through this Article, six types of transactions which, under the conventional definition of sale, would not mean 'sale' had now become "Deemed Sale". One such transaction is taxing the Indivisible Works Contract: Article 366 (29A) (B) reads as "Tax on the sale of purchase of goods" includes a tax on the transfer of property in goods (whether as goods or in some other form) involved in execution of works contract. Post the 46th Constitutional Amendment, the Constitutional Bench in the judgment titled, Builders Association of India v. Union of India , [1989] 73 STC 370 (SC) at page 73 was pleased to hold that prior to the 46th amendment, the supply/sale component in a divisible contract could be taxed. Whereas after the 46th amendment, it had b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to Section 36 (1A) of the DVAT Act which casts an obligation on the part of the main contractor to deduct TDS while making payments to the sub-contractor, over and above Rs. 20,000/-and TDS Certificates are issued in favour of the sub-contractor to enable them to seek adjustments at the time of payment of taxes at their end. Still the DVAT Act and Rules do not provide any mechanism for deducting the sub-contractor's turnover in the hands of the main contractor, which situation was incomprehensible. Learned Senior Counsel also took pain to demonstrate the adverse consequences in the absence of deduction mechanism of sub-contractors turn over which he narrated in the following sequence.:- ( i ) The Constitutional Bench, in both Builders Association and Gannon Dunkerley case, was pleased to hold that the limitations and discipline, which would prevail while taxing goods as chattle under Entry 54, List-II, would prevail also to a works contract levy. In the second Gannon Dunkerley, the Constitutional Bench was pleased to hold that power of the States under Entry 54 of the State List is subject to two limitations - (1) flowing from the entry itself which makes the said po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover of 'B' assessed twice both in the hands of 'A' and 'B', unless 'A' retransfers or re-sells the goods, which is an independent sale activity in the hands of 'A'. ( ix ) Similarly, the turnover of sub-contractor B, cannot be assessed or grossed up in the turnover of main contractor "A" nor can the turnover of sub-contractor B assessed twice, both in the hands of B and A. ( x ) Considering all these, all the State Legislations including erstwhile "Delhi Works Contract Act, 1999" envisaged a deduction of sub-contractor's turnover in the hands of the main contractor, which is conspicuous by its absence under the present DVAT Act, 2004 and DVAT Rules, 2005. 12. Mr. Venkatramani also argued that the multiple levy of tax i.e. both in the hands of the main contractor as well as in the sub-contractor was not permissible having regard to the judgment of the Apex Court in the case of Larsen Toubro Ltd. ( supra ). 13. To sum up, the contention of the petitioner is that; ( i ) There is only one transfer of property in goods. There is no re-transfer or multiple/plurality of deemed sales. ( ii ) There can be incidence of levy, only once. When t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om which cannot be questioned His submission was that in any case, even under the provisions of Delhi Value Added Tax Act, 2004 the turnover of sub-contract is not taxed in the hands of the contractor but through a different mechanism of allowing input tax credit of the tax paid by the sub-contractor to the main contractor. For example, if a contractor has been awarded a contract of Rs. 100/- and, in turn, he awards a sub- contract for Rs.60/- where the turnover of the sub-contractor is allowed to be deducted from the turnover of the contractor, the rate of tax assuming to be 10% contractor would be liable to pay tax of Rs. 4/- (100-60 =40 @ 10% =Rs.4/-) Under the Input Tax mechanism since the contractor is liable to pay net tax as per sub section (3) of Section 3 of DVAT Act , output tax on his turnover of Rs. 100 is Rs. 10/- but the input tax credit to which he is entitled on the turnover of Rs. 60/- of sub-contractor is Rs. 6/- which he is entitled to adjust against his output liability and thus his net tax which he is required to pay is Rs. 4/- which is the same. Hence, the bogey of double taxation raised by the petitioner is without any substance. It was also argued that TDS p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing officer had no option but to allow the charges towards labour and services as per the table appended to the proviso to rule 3 (2) of the Delhi VAT Rules, 2005. 18. We have bestowed our anxious consideration to the submissions advanced before us by the learned counsel for the parties. 19. Section 5 defines 'taxable turnover' and reads as under:- "5. Taxable turnover- (1) For the purposes of this Act, taxable turnover means that part of dealer's turnover arising during the tax period which remains after deducting therefrom- ( a ) The turnover of sales not subject to tax under section 7 of this Act; and ( b ) The turnover of sales of goods declared exempt under section 6 of this Act. (2) In the case of turnover arising from the execution of a works contract, the amount included in taxable turnover is the total consideration paid or payable to the dealer under the contract excluding the charges towards labour, services and other like charges, subject to such conditions as may be prescribed: Provided that where the amount of charges towards labour, services and other like charges is not ascertainable from the books of account of the dealer, the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions are to be granted is the legislative prerogative. 23. It is a difficult proposition advanced by the learned Senior Counsel for the petitioner predicated on two constitution Bench judgments and the 46th Constitutional Amendment. The mileage which is sought to be drawn on the basis of the aforesaid judgments and the constitutional amendment is only to the effect that it becomes an obligation of the State, while framing the rules, to ensure that all proper deduction are allowed so that they do not form part of measures of taxation. However, that cannot be the basis of seeking to invalidate the provisions of a statute. The edifice of the petitioner's case questioning the validity of the impugned provision is built on the so called adverse consequences which may follow in the absence of deduction mechanism of sub-contractor turnover. On the basis of so called difficulties, a particular provision of a statute cannot be invalidated. 24. Learned counsel for the respondent is right in submitting that in Larsen Toubro Ltd . ( supra ), the Supreme Court found a specific provision in the Andhra Pradesh VAT Act and the validity of Delhi VAT Tax and Delhi VAT Rules cannot be tes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... code by itself It begins with a non obstante clause. It, inter alia, states that every dealer executing a works contract shall pay tax on the value of goods at the time of incorporation of such goods in the works executed at the rates applicable to the goods under the Act. The point to be noted is that Section 4(7)(a) of the 2005 Act indicates 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 value of the goods which constitutes the measure for the levy of the tax is the value of the goods at the time of the incorporation of the goods in the works. What is stated hereinabove also finds place in rule 17(1)(a) of the APVAT Rules, 2005, quoted hereinabove. It is important to note that each of the sub-contractors of L T is registered dealer. None of them are unregistered." 27. It was on the basis of interpretation of that Section the Apex Court held that the turnover of the sub-contractor could not be added to the turnover of the L T. It is clear from the following:- "16. In this case we are concerned with Andhra Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause 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." 28. The Apex Court also made a reference to its decision in the case of Builders' Association of India ( supra ) as under:- "Ordinarily unless there is a contract to the contrary, in the case of 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 re incorporated in the building." Therefore, even in the case of works contracts, it would depend upon the terms of the contract as to when the parties intend to pass the property. That would depend upon the agreements between the petitioner and sub-contractor which are not produced here. As submitted by the respondents, the petitioner despite several opportunities did not produce copies of any of the contracts with the contractors or with the sub-contractors so much so that the petitioner had to be given even show cause notice dated 13.10.2011 and 11.11.2011 specifically pointing out that the petitioner had failed to provide information/d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nconstitutional viz. namely it offends some constitutional provision. 31. While we can only comment that it would be for the Legislature to look into this aspect and decide whether to incorporate any such provision or not, Section 5(2) of Delhi VAT Act and Rule 3 of Delhi VAT Rules cannot be declared to be invalid. Hence it is found that as per mechanism provided in Delhi VAT Act, the turnover of the sub-contractor is not taxed in the hands of the contractor but through a different mechanism of allowing input tax credit of the tax paid by the sub-contractor to the main contractor and does not result in multiple taxation. 32. Since we are upholding the validity of the provisions, we are not examining the impugned orders on merits, it is for this reason that there is a provision for appeal and in fact appeals are even filed by the petitioner. We may also note that the petitioners have contended that the impugned order are passed in violation of principle of natural justice. That is again an argument which can be taken in the appeals filed by the petitioners against the impugned orders. 33. These writ petitions are accordingly dismissed. All pending CMs also stand disposed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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