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IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH

DATED THIS THE 27TH DAY OF APRIL 2019

PRESENT

THE HON’BLE MR. JUSTICE G.NARENDAR

AND

THE HON’BLE MR. JUSTICE BELLUNKE A.S.

WRIT APPEAL NO.100235/2018 (T-RES)

BETWEEN

JMC CONSTRUCTIONS PVT LTD CORPORATION OFFICE AT 27-972/1, TELECOM COLONY,CHITTOOR, ANDHRA PRADESH-517001, REP. HEREIN BY ITS AUTHORISED SIGNATORY & DIRECTOR, MR. A.MADAN MOHAN.

... APPELLANT (BY SRI. K.P.KUMAR, SENIOR COUNSEL FOR SMT.MAMATHA ROY, ADVS.)

AND

1. THE STATE OF KARNATAKA REPRESENTED BY ITS

FINANCE SECRETARY, VIDHANA SOUDHA,

BANGALORE-560001.

2. THE COMMISSIONER OF COMMERCIAL TAXES VANIJYA THERIGE KARYALAYA, 1ST FLOOR, GANDHINANAGAR, BANGALORE-560009.

3. THE COMMERCIAL TAX OFFICER (ENFORCEMENT)-10, HUBLI-580025.

4. M/S.KMC-JMC (JV), HAVING OFFICE AT NO.1, SKS REFINERIES (P) LTD., PREMISES, GBN ROAD,

R

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MADHUGIRI 572132, REP. BY ITS JOINT DIRECTOR.

... RESPONDENTS

(BY SRI.RAVI V. HOSAMANI, AGA FOR R1 TO R3, SRI. SHIVARAJ S. BALLOLI, ADV. FOR R4)

THIS WRIT APPEAL IS FILED U/S.4 OF KARNATAKA HIGH COURT ACT, 1961, PRAYING THIS HON'BLE COURT TO, ALLOW THIS WRIT APPEAL, SET ASIDE THE IMPUGNED ORDER DATED 27.06.2018 PASSED BY THE LEARNED SINGLE JUDGE IN W.P. NO.103934/2018 AND ALLOW THE WRIT PETITION, IN THE INTEREST OF JUSTICE AND EQUITY.

THIS WRIT APPEAL COMING ON FOR ‘DICTATING ORDERS’, THIS DAY, G.NARENDAR J., DELIVERED THE FOLLOWING:

JUDGMENT

Heard the learned senior counsel Shri K.P.Kumar

along with the learned counsel Smt. Mamatha Roy for the

appellant and the learned AGA Shri Ravi V. Hosamani on

behalf of respondent Nos.1 to 3 and Shri Shivaraj S.

Balloli on behalf of the respondent No.4.

2. The parties are referred to by their

nomenclature in the writ petition for the sake of

convenience.

3. The petitioner is a company registered under

the provisions of the Karnataka Value Added Tax Act,

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2003 (hereinafter referred to as ‘KVAT Act, 2003’) and is

engaged in the execution of work contracts. During the

relevant tax periods in question, namely April 2012 to

March 2013, the petitioner had opted to pay tax under the

composition scheme as per the provisions of Section 15 of

the KVAT Act, 2003.

4. It is further submitted that the petitioner had

entered into a joint venture agreement on 16.08.2011 with

KMC Constructions Limited for the purpose of submitting

a bid for widening and strengthening of existing

intermediate lane carriageway to two lane carriageway

from K.m. 290.20 to K.m. 343.80 on NH – 234 i.e., Sira

Madugiri Section, in Karnataka under the special project

scheme. The joint venture bid i.e., of the KMC & JMC

Constructions being the lowest, they were awarded the

work vide Agreement dated 30.08.2011and Work Order of

even date issued by the Executive Engineer, National

Highways Special Division, Bengaluru. It was agreed

between the constituents of the joint venture i.e., M/s.

KMC Constructions Limited and M/s. JMC (the petitioner

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herein), that the entire work would be subcontracted to

the petitioner. In lieu of the agreement, petitioner executed

the entire work as a subcontractor for the joint venture

entity of M/s. KMC Constructions and M/s. JMC

Constructions and who being the main contractor would

raise bills on the NHAI (Employer) from time to time. NHAI

would then make payments to the main contractor i.e.,

the joint venture and while making such payments, NHAI

would deduct tax at the rate of 4% as per the provisions of

Section 9A of the KVAT Act, 2003 and issue TDS

certificates to the joint venture entity.

5. It is further submitted that the petitioner did

not pay tax on its works contract turnover since the tax

payable on the turnover of works contracts executed in

favour of NHAI was already deducted by the employer

(NHAI) while releasing payments to the main contractor

who, it is pertinent to note has not claimed refund in its

returns filed under the KVAT, Act for the relevant tax

periods and that the instant claim is also barred by time

and hence the credit of the said TDS was required to be

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given to the petitioner, as it has executed the works

awarded to the main contractor. It is further submitted

that if the petitioner were also to pay tax on its turnover, it

would have resulted in tax having been paid twice over to

the State (once indirectly, through the main contractor/4th

respondent, by way of TDS and again directly by the

petitioner) on execution of the very same works contract,

which would amount to double taxation, which is

impermissible in law. Hence, the petitioner did not pay tax

under the KVAT Act in respect of the works contract

turnover as the employer (NHAI) had already deducted and

remitted the tax to the State.

6. While the position stood thus, on 05.12.2017,

the 3rd respondent after inspecting the petitioner’s

premises and examining its books of accounts, issued a

notice proposing to reassess the petitioner’s tax liability

for the tax periods April 2012 to March 2013. In the said

notice, the 3rd respondent inter alia proposed to tax the

turnover of work contracts executed by the petitioner as a

subcontractor for the joint venture – 4th respondent.

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7. The petitioner thereafter filed a detailed

response to the reassessment notice vide its reply dated

16.12.2017. In the said reply, the petitioner, inter alia

informed the 3rd respondent that the joint venture had

allotted the entire work to the petitioner on a back to back

basis and that the government/tendering

authority/Employer has already deducted tax at the rate

of 4% on the work executed and transferred to the

employer. The petitioner further stated that the joint

venture has not claimed refund of the TDS from the State.

The petitioner accordingly requested the 3rd respondent to

adjust the TDS in the hands of the joint venture against

the petitioner’s liability since the tax relates to execution

of the very same works. In order to substantiate its claim,

the petitioner filed TDS certificates issued by the NHAI to

the joint venture and requested for adjustment of

Rs.60,75,268/- deducted by NHAI while making payments

to the joint venture and later remitted to the State by

NHAI in compliance of the provisions of S.9-A(5).

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8. The 3rd respondent, however, rejected the

petitioner’s request in this regard and passed a

reassessment order dated 28.03.2018 under Section 39(1)

of the KVAT Act, 2003. The rejection order appears to be

based on the circular issued by the Commissioner of

Commercial Taxes on 23.12.2014 directing that there can

be no transfer of TDS credit in favour of a third person. In

the said reassessment order, the 3rd respondent observed

that the TDS made in the name of M/s. KMC-JMC-(JV)

the main contractor in this case amounting to

Rs.60,75,268/- cannot be given as credit to the tax

payments to be made by M/s. JMC Constructions Private

Limited, who is a subcontractor in this case. The 3rd

respondent further levied interest and penalty under

Sections 36(1) and 72(2) of the KVAT Act and issued a

demand notice also dated 28.03.2018 calling upon the

petitioner to pay the reassessed tax, interest and penalty

within 30 days from service of the notice.

9. In support of his observation that adjustment

of TDS in the hands of the main contractor against the tax

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liability of the subcontractor is impermissible. The 3rd

respondent relied upon Circular No.21/2014-15 dated

23.12.2014 issued by the 2nd respondent, Commissioner

of Commercial taxes. In the said circular, the 2nd

respondent has issued instructions to all the officers not

to adjust TDS in the hands of the main contractor against

the tax liability of a subcontractor, as the two are separate

and distinct entities. In the said circular, the 2nd

respondent further observed that it is the obligation of the

subcontractor to file his returns and pay tax on the works

executed by him, irrespective of the fact that tax has been

deducted in the hands of the main contractor.

10. Thereafter, on 30.05.2018, the 3rd respondent

issued a notice under Section 45 of the KVAT Act, 2003 to

the Branch Manager of the petitioner’s bank, namely

Andhra Bank, Chittoor, Andhra Pradesh. In the said

notice, it was stated that the bank holds/owes monies on

behalf of/to the petitioner. The 3rd respondent, therefore,

directed the bank to pay out such monies held by it to the

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3rd respondent towards the satisfaction of the tax, interest

and penalty reassessed for the tax periods in question.

11. Aggrieved by the reassessment order and

demand notice dated 28.03.2018 as well as the aforesaid

circular issued by the 2nd respondent, the petitioner

approached this Hon’ble Court in Writ Petition

No.103934/2018. It was submitted that the denial of the

petitioner’s request for adjustment of TDS in the hands of

the joint venture – main contractor was primarily based on

the instructions contained in Circular No.21/2014-15

dated 23.12.2014 issued by the 2nd respondent in

pursuance of the powers conferred under Section 59(1) of

the KVAT Act, (which the petitioner impugned in the writ

petition). It was submitted that as the KVAT Act, 2003 did

not provide any recourse against the circular issued by

the 2nd respondent under Section 59(1), the petitioner was

constrained to approach this Hon’ble Court under Article

226 of the Constitution of India since all instructions

issued by the 2nd respondent are binding on the

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authorities involved in the implementation & execution of

the Act.

12. That the Hon’ble Supreme Court and the

Hon’ble High Courts in a number of judgments have held

that once the highest functionary in the hierarchy of

authorities has expressed its opinion on a particular

issue, then it would be wholly impracticable to expect

subordinate authorities, including appellate authorities to

take a contrary stand. The petitioner sought to invoke the

extraordinary jurisdiction of this Hon’ble Court under

Article 226 of the Constitution of India. However, the

learned Single Judge vide the impugned order, dismissed

the writ petition and declined to exercise the writ

jurisdiction of this Hon’ble Court on the ground that there

exists an efficacious and alternative remedy by way of an

appeal under Section 62 of the KVAT Act, 2003.

13. It is submitted that the learned Single Judge

has erred in passing the impugned order as it failed to

appreciate that it would be an exercise in futility to

approach any of the authorities designated under the Act,

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including the first appellate authority by way of an appeal

under Section 62 of the KVAT Act, 2003, since the highest

functionary in the Commercial Taxes Department i.e., the

Commissioner of Commercial Taxes has already expressed

his view on the issue at hand. Moreover, the KVAT Act,

2003 does not provide any avenues to challenge circulars

issued under Section 59(1) and therefore, the learned

Single Judge ought to have exercised the writ jurisdiction

instead of holding that the petition is not maintainable

and on that erroneous basis, relegating the appellant to

avail the appellate remedy under the KVAT Act, 2003, a

futile exercise.

14. The learned Senior counsel has also placed

reliance on the ruling rendered by the Co-ordinate Bench

in the case of Ashok Agencies, Bangalore vs. State of

Karnataka and others reported in 2008 (65) Kar.L.J.

97 (HC) (DB), to contend that the writ petition is

maintainable on account of the circular issued by the

Commissioner of Commercial Taxes bearing No.21/2014-

15 dated 23.12.2014. He would invite the attention of this

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Court to the observations of the Co-ordinate Bench at

paragraphs 3 to 6, wherein the Co-ordinate Bench has

been pleased to hold that the alternative remedy of appeal

is not an efficacious remedy as all the authorities involved

in adjudicating the disputes that arise under the Act are

undoubtedly bound by the circular issued by the

Commissioner of Commercial Taxes who is a superior

authority in the hierarchy of the officers.

15. He would also place reliance on the order dated

13.07.2018 passed in STRP No.23/2017, whereby the Co-

ordinate Bench has been pleased to admit the revision

petition to consider the question as to whether TDS

collected at source by the employer from the payments

made to the principal contractor can be given credit in the

hands of the sub contractor or not. The consideration of

the said issue would require a ruling on the correctness of

clause (f) of Rule 44(3) of the KVAT Rules which

apparently prohibits the transfer of the credit of the TDS

already deducted on account of one person/entity, either

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directly or through any other person to the account of

another person.

16. The respondent revenue has resisted the writ

appeal by filing statement of objections dated 18.01.2019,

as the writ petition has been apparently considered and

dismissed at the preliminary hearing stage itself.

17. The revenue has fairly admitted the factual

matrix of the case, that is the facts pertaining to the

deduction of tax in the hands of the main contractor and

remittance of the TDS amount by the employer with the

respondent authorities, on account of the works contract

awarded to the main contractor, i.e., the 4th respondent

and the facts pertaining to execution of the said work by

the petitioner/sub contractor. It is also pertinent to note

that the revenue has not denied the factum of the

petitioner having entered into a contract with the main

contractor and the factum of execution of the contract

work having been entrusted to the petitioner by the main

contractor as a back to back contract i.e., entrustment of

execution of the entire works contract only.

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18. The fulcrum of the defence set up by the

respondents is the circular issued by the Commissioner of

Commercial Taxes dated 23.12.2014 vide Annexure – E

to the writ petition, whereby the Commissioner of

Commercial Taxes placing reliance on the provisions of the

Section 9A of the KVAT Act, 2003, as ordered as under:

“7. Further, it is also noticed that the

sub contractors who are executing the woks

contract on behalf of the main contractors are

requesting the departmental officers to adjust

the tax deducted at source by the TDS

authorities payable to the main contractor

towards their tax liability instead of refunding to

the main contractor. There are also instances

where the main contractors have requested to

adjust the amount of tax deducted from their

account towards the tax liability of their sub

contractors. Hence, there is a necessity to clarify

as to whether the said adjustment can be made

if there is no liability of tax for the main

contractor. It is a general practice that the main

contractor who has been awarded the contract

from the Government departments or public

sector undertaking to assign the whole or part of

such contract to a sub contractor or a number of

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sub contractors. The payment made to sub

contractors are allowed as deduction in the

hands of the main contractors the TDS made by

the Government department and public sector

undertaking is credited to the account of the

main contractor. As per the return filed by the

main contractor, the amount of TDS is given

credit as if it is paid by him. The sub-contractor

is a separate and distinct entity independent of

the main contractor and is required to file the

return and pay tax as per his return. The tax

payable by the sub-contractor is dependent on

the amount received by him from the main

contractor which also includes the tax payable

by the sub-contractor.

8. As per the provisions of the KVAT

Act, 2003, the request of any dealer whether he

is a sub-contractor or a main contractor to

adjust the amount of the TDS made by the tax

deducting authority towards the liability of the

sub-contractors should not be entertained. The

only way for the main contractor is to claim the

refund of the excess credit of tax in his account

due to TDS in his monthly returns which may be

made after audit of his accounts. The TDS

amount is not transferable from the account of a

main contractor to that of a sub-contractor. A

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sub contractor has to pay his tax liability in full

irrespective of any TDS done by the contractee

while making payments to the main contractor.

Therefore, the officers of the department are

instructed that they should not give credit of

TDS amount from the amount of the main

contractor to that of a sub contractor.”

19. It is relevant to note that the statement of

objections is more inclined towards the technical aspect of

the issue. The challenge to the validity of the above

circular is sought to be negated on the premise that the

circular is a validly issued circular in terms of Section 59

of the Act which apparently authorizes the Commissioner

of Commercial Taxes issue circulars to remove the

difficulties and hurdles that arise in the course of

implementation of the statute. It is admitted in paragraph

10 that as a practice, the VAT officers were giving set off to

the sub contractors for the TDS in the hands of the main

contractor, even when the main contractor had not given

up their rights to seek for refund or set off or adjustment

on account of the TDS credited as against their account. It

is further contended that as the petitioner has not laid any

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challenge to the validity of Rule 44(3)(f) of the KVAT Rules,

the challenge to the circular is impermissible, as the

circular is in consonance with the provisions of clause (f)

of Rule 44(3) of the KVAT Rules, 2005. It is pertinent to

note that an attempt is made to justify the circular in

terms of Rule 44(3)(f) of the KVAT Rules.

20. On perusal of the circular, it is seen that no

reliance is placed by the Commissioner of Commercial

Taxes on the provisions of Rule 44(3)(f) and on a

comprehensive reading of the same, the inference one can

draw is that the circular has been found necessary by the

Commissioner to deter the VAT officers from giving set off

to the sub contractors on account of the TDS in the hands

of the main contractor. It is further contended that the Co-

ordinate Bench of this Court has ruled that Section 9A of

the KVAT Act, 2003 does not entitle a sub contractor to

seek transfer of set off of TDS in the hands of the principal

contractor.

21. Continuing further, it is pleaded that “the set

off of TDS in favour of the petitioner (appellant) can be

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extended in a case, where the principal contractor in turn

submits that he is not claiming any benefits of TDS and

the entire deductions can be transferred in favour of the

sub contractor, under such circumstances, the benefit of

TDS can be extended in favour of appellant herein.” In the

absence of the same, the department cannot transfer TDS

and the same is also barred under Rule 44(3)(f) of KVAT

Rules 2005. The main contractor i.e., the 4th respondent

was not a party to the writ petition and was brought on

record by way of an application preferred under Order 1

Rule 10 of CPC which came to be allowed by this Court by

order dated 10.04.2019.

22. It is also relevant to note that the 3rd

respondent, the Commercial Tax Officer has filed an

affidavit dated 24.04.2019 and it is categorically admitted

that the petitioner is a sub contractor of the joint venture

entity KMC/JMC Constructions. It is also admitted that

the RA bills have been raised by the main contractor only

and that the employer (M/s. NHAI) has made the

payments against the bills after deducting tax at source

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(TDS). That the main contractor has been issued Form

VAT – 156 and that the main contractor is also a

registered dealer under KVAT Act and has filed returns in

VAT Form 120 under its registered Tin No.29060808668.

It is further deposed that the main contractor in its

monthly returns filed during the period April 2012 to

March 2014 has declared the TDS suffered by it from time

to time under the payments in lieu of the RA bills raised

by it on the employer. That the main contractor has not

claimed refund, but has opted to carry forward the credit

by showing the VAT – TDS amount in the column for

credit carry forwards (5.3.2 in form VAT 120). The copies

of the returns have been produced along with affidavit and

the Annexures R-1 to R-24. It is further deposed that the

returns is a clear indicator of the main contractor,

intention to assert it’s right/claim over the amount lying

in its credit for future adjustment. It is further deposed

that the tax authorities are required to act as trustees in

respect of the carried forward credit held in favour of the

main contractor.

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23. It is further fairly admitted that subsequently

the main contractor has omitted to declare this VAT TDS

credit even in the column 5.3.2. That despite the non-

declaration of the amount in column 5.3.2, the total VAT

TDS amount is still reflected as lying in credit of the main

contractor. It is further deposed that the provisions of

Section 10(5) of the KVAT Act does not prescribe any

limitation for claiming refund and hence, it is contended

that the tax assessment in respect of the petitioner will

not amount to double taxation in respect of the same

transaction.

24. It is further deposed that though the total

receipts for the works contract is taxable at the rate of 4%

under the compensation scheme, but insofar as it relates

to interstate and URD purchases, the petitioner is liable to

pay tax at the applicable rate. It is further deposed that on

account of these factors i.e., interstate goods and the URD

purchases, the total tax liability of the sub contractor may

even exceed the total amount deducted as VAT – TDS and

that the VAT TDS is only a safeguard mechanism adopted

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by the legislature and hence, no fault or irregularity can

be found in the actions of the respondents.

25. The 3rd respondent has deposed further and

places reliance on the clause 2.6 of the sub contract

agreement dated 14.09.2011, admittedly between the

main contractor - 4th respondent and the petitioner/sub

contractor which reads as under:

“2.6: JMC shall be solely responsible and

liable for copying with all the applicable rules of

the Government/Statutory Authorities/Local

Bodies for income tax, sales tax, works contract

tax, service tax any other direct or indirect

taxes, levies, charges, present and future as

also for all payments thereunder in respect of or

in relation to the work and / or the contract

except the TDS applicable to the payment made

to KMC in terms of Article 3.1 herein after. All

liabilities on account of aforesaid taxes, levies,

charges, etc. shall be bourn solely and

exclusively by JMC, similarly, JMC shall have

sole and exclusive right on all refunds as may

be received by JV from authorities in respect of

such taxes, levies, charges etc.”

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26. The deponent in paragraph 8 of the affidavit

seeks to withdraw the concession earlier made in

paragraph 12 of the statement of objections dated

18.01.2019. It is further submitted that the entire stand of

the revenue hinges on the provisions of Rule 44(3)(f) of the

KVAT Rules and the circular dated 24.03.2012 said to be

in consonance with Rule 44(3)(f) of the KVAT Rules. It is

relevant to note that the facts relating to returns filed by

the main contractor and the credit on account of the TDS

deducted by the employer and remitted with the

respondent and the same lying in the account of the main

contractor are all fairly admitted by the respondents.

27. It is also relevant to note at this stage itself

that the petitioner had filed a memo dated 10.08.2018

enclosing therewith the certificate issued by the concerned

CTO certifying that the main contractor has not claimed

any refunds from his office from 2012-13 onwards to till

date. The said certificate is also admitted by the

respondents.

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28. The petitioner has also filed one more memo

dated 29.03.2019 enclosing therewith a copy of the letter

dated 25.03.2019 addressed by the 4th respondent/main

contractor to the Commercial Tax Officer, Audit and

Recovery, Madugiri. Under the said letter, the 4th

respondent/main contractor has stated that it has sub

contracted the entire work to the petitioner on a back to

back basis and on account of the same, the works

contract was executed by the sub contractor only and no

other tax liability has been incurred by the main

contractor. It is further stated that the JV is not carrying

on any other activity or business and hence has not

incurred any other tax liability at all. It has also detailed

the work executed between 2012-13 to 2016-17. It has

also enclosed the various TDS certificate in Form 156 in

all aggregating to Rs.5,12,83,419/- lying in the account of

the respondent revenue department.

29. It is further reiterated by the learned Sr.

Counsel that the entire work had been entrusted to the

sub contractor and hence, the TDS should enure to the

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benefit of the sub contractor, as the said tax has been

deducted at source on account of the work executed by

the sub contractor out of the bill raised by the main

contractor against such executed work and that the work

executed is the only taxable event. It is further stated that

the main contractor has assumed that the revenue

authorities would accordingly credit the entire TDS to the

account of the sub contractors. It is also clarified that the

returns filed every month by the main contractor reflects

nil turn and nil tax liability. It is further asserted that it

has not claimed any refund whatsoever till date and that it

is giving up its right to claim refund subject to the revenue

giving credit of the entire TDS to the sub contractor’s

account.

30. The receipt of the letter and the TDS forms

enclosed along with the memo are admitted by the

respondents. But an objection was raised that the main

contractor not being a party to the instant proceedings it

may claim that any findings in the instant proceedings it

are not binding on it.

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31. To address this concern, the petitioner took

steps to bring on record the main contractor/the 4th

respondent, and an application came to be preferred

under Order 1 Rule 10 of CPC and the same came to be

allowed by order dated 10.04.2019.

32. The main contractor 4th respondent after

coming on record has filed an affidavit and has virtually

reiterated the contents of the letter dated 25.03.2019

addressed to the department and paragraphs 8, 9 and 10

read as under:

“8. I state that, as the JV had not

carried on any business whatever during those

years or even now, the entire TDS aggregating

to Rs.5,12,83,419/- including Rs.60,75,268/-

pertaining to the Assessment year 2012-13 is

lying with the revenue. It is settled law that

where work is entrusted to a sub contractor, the

sub contractor is liable to VAT and not the main

contractor. As the JV had entrusted the entire

work to the sub contractor, the entire TDS

should be related to the sub contractor

appellant. The JV assumed that the revenue

would accordingly credit the entire TDS to the

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account of the sub contractor appellant. It can

be noticed that the returns filed by us every

month should nil turnover and nil tax liability.

9. I state that, the JV has been

informed that the appellant has not been given

credit for TDS and ignoring the fact that as

much as by 5.12 crores of tax is lying with the

revenue all along wholly relatable to the sub

contractor appellant’s work, huge demands are

raised on the sub contractor appellant.

10. I state that, JV was of the view that,

TDS will go to the account of the Appellant sub

contractor. However, the same has not been

done under the anticipation that the JV may

claim in the future. Thus, I as joint director of

the JV, hereby confirm that the JV has not

claimed any refund whatever and the JV gives

up its right to claim refund subject to the

Revenue giving credit of the entire TDS to the

sub contractor appellant’s account.”

33. From the above discussion, what this

Court is able to discern is that the 4th respondent

was awarded a works contract i.e., for upgradation of

the carriageway from K.m. 290.20 to K.m. 343.80 by

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the NHAI. That the 4th respondent is a joint venture

of two independent entities separately registered as

dealers under the Act. The JV is also independently

registered under the Act as a dealer and has been

allotted a separate tin number i.e., in effect, the

constituents of the joint venture, though are

independently registered as dealers have acquired

the status of separate entity on account of their joint

venture entity being registered as an independent

dealer under the Act. The other admitted fact is that

the JV has further agreed to sub contract the entire

works contract to one of its constituents i.e., the

petitioner. Hence, the petitioner is peculiarly placed.

As a constituent of the joint venture, credits are lying

in its account. But on account of it executing the

contract as a sub contractor under the independent

arrangement arrived at between the JV and the

petitioner, it is required of this Court to determine as

to in whose hands the taxable event has occurred.

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34. It is fairly admitted by all the parties that

the works contract has been awarded by the

employer, namely NHAI in favour of the joint venture

company only i.e., the 4th respondent. It is also fairly

admitted that the petitioner is a constituent of the

joint venture entity. It is also fairly admitted by all

the parties that the execution of the work awarded in

favour of the joint venture entity has been entrusted

to the petitioner, what in commercial parlance is

described as a back to back contract which entails

the complete execution of the contract awarded in

favour of the other party who is normally the main

contractor.

35. In view of the above, for the sake of brevity

and clarity, the parties to the proceedings namely the

4th respondent is referred to as the main contractor,

the petitioner is referred to as the sub contractor and

the respondents 1 to 3 are referred to as the revenue.

36. We have given our anxious consideration

to the various contentions and having adverted to

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the pleadings, we are of the opinion that the points

that fall for consideration by the Bench for the

disposal of the present writ appeal are as below:

i) Whether the writ petition is

maintainable in the light of the alternative

remedy of appeal being made available

under Section 62 of the KVAT Act, 2003, as

held by the learned Single Judge?

ii) Whether the taxable event has

occurred in the hands of the 4th respondent

– main contractor or in the hands of the

petitioner – sub contractor the petitioner

herein?”

37. The learned Senior Counsel Sri K.P.Kumar

has placed reliance on the ruling rendered by this

Court in the case of Ashok Agencies, Bangalore vs.

State of Karnataka and others reported in 2008

(65) Kar.L.J. 97) (rendered by a coordinate bench

of this Court). The Co-ordinate Bench while

answering the objection regarding maintainability of

the writ petition in the light of the availability of

alternative remedy of appeal, has placed reliance on

- 30 -

a decision rendered by another Co-ordinate Division

Bench rendered in the case of Balaji Computers and

others Vs. State of Karnataka and others reported in

2005 (59) KAR.L.J. 529 wherein it was held as

under:

“Merely because, the proviso given to Sub-

section (1) of Section 3-A of the Karnataka

Sales Tax Act, 1957, prohibits the Commissioner

to give any instructions which interferes with

the power of the Appellate Authority, in our

view, it is not possible to even remotely think

that the concerned authorities will go against

the instructions given by the Commissioner in

Circular, Annexure-D and give scope for any

disciplinary proceedings against them. It is

necessary to point out that going against the

instructions would result in revenue loss to the

State, and therefore, no Officer can afford, apart

from the fact that he is obliged under Section 3-

A (1) of the Act, to carry out the instructions of

the Commissioner, which may attract

disciplinary proceedings resulting in his removal

from service. Under these circumstances, in the

light of the clear unequivocal

instructions/directions given by the

Commissioner as stated above, in my view,

- 31 -

filing objections before the Assessing Authorities

would be an empty formality. Such a remedy

available to the assessees cannot be

considered, in the eye of law, as an effective

alternative remedy. Though the proviso given to

Sub-section (1) of Section 3A of the Act prohibits

the Commissioner from issue of any instructions

which interferes with the discretion of the

Appellate Authority, once such instructions are

given, it is not reasonable to expect that even

such appellate authorities who are subordinate

to the Commissioner, would go against the

instructions given by the Commissioner and

take a view different to the one expressed by

the Commissioner in his instructions Circular

Annexure-D. The mandate of the proviso is the

Commissioner not to give any instructions which

would interfere with the discretion to be

exercised by the Appellate Authorities. It is also

necessary to point out that to file an appeal

against the order of assessment or

reassessment made, the assessees will have to

deposit 50 per cent of the tax assessed.”

38. The coordinate bench in the case of Balaji

Computers in turn has placed reliance on the ruling

of the Hon’ble Apex Court rendered in the case of

- 32 -

Filterco and Another vs. Commissioner of Sales

Tax, Madhya Pradesh and another (1950-2004)1

SCST 704 wherein it was held as below:

“Held: that the order passed by the

Commissioner was clearly binding on the Assessing

Authority under Section 42-B(2) of the Madhya

Pradesh General Sales Tax Act, 1958 and though it

was open to the appellants to urge their contentions

before the Appellate Authority, the Appellate

Assistant Commissioner, that would be a mere

exercise in futility when a superior officer, the

Commissioner had already passed a well-

considered order in exercise of his statutory

jurisdiction under Section 42-B(1). Further, a

substantial portion of the tax had to be deposited

before an appeal or revision could be filed. In such

circumstances, the High Court ought to have

decided the petition on the merits.”

39. From the above rulings, it is apparent that

the Courts have consistently held that a Circular

issued by the Commissioner in exercise of the power

vested in him under the Act is binding on the

Appellate Authority and in such a factual matrix

calling upon the assessee to avail of the remedy of

appeal would be a mere exercise in futility, as the

fact remains that an Officer superior in the

- 33 -

departmental hierarchy has already passed a

considered order or has rendered a detailed opinion

and the division bench has also opined that it is not

possible, even to remotely think, that the concerned

authorities will go against the instructions given by

the Commissioner in the form of a Circular and

thereby give scope for initiation of disciplinary

proceedings against them. It has also observed that

going against the instructions could be construed as

an act resulting in revenue loss to the State and be

made a ground to initiate disciplinary proceedings

resulting even in his/her removal from service. That

apart, the coordinate bench has also placed reliance

on provisions of Section 3-A(i) of the Act to hold that

the subordinate officers are bound to carry out the

instructions of the Commissioner.

40. The fulcrum of the defence in the instant

case is the Circular dated 23.12.2014 issued by the

Commissioner of Commercial Taxes bearing

No.I&C/DC(A3)/CR-104/2014-15 produced at

- 34 -

Annexure-E to the writ petition. The Commissioner

in paragraphs 7,8 and 9 of the Circular has issued

instructions amounting to prohibiting the VAT

Officers from giving set off or adjusting the tax

deducted at source by the TDS Authorities towards

the tax liability of the sub- contractor and has

instructed that the payments made to sub-

contractors which was hitherto allowed as deduction

in the hands of the main contractor in lieu of the

TDS credited to the account of main contractor has

been disapproved. The disapproval, according to the

Commissioner is on the basis that the main

contractor and the sub-contractor are separate and

distinct entities and both are required to file the

returns and pay tax as per the return and it is

further instructed that the request of any dealer

whether he is a sub-contractor or main contractor, to

adjust the amount of the TDS by the TDS authority

towards the liability of the sub-contractor should not

be entertained.

- 35 -

41. Admittedly, in the instant case, the bone of

contention is the amount deducted by the TDS

authority i.e., the employer (NHAI) who has awarded

the contract to the main contractor i.e., the 4th

respondent and who has deducted the VAT- TDS in

the hands of the main contractor and remitted the

same on account of the works contract covered

under the work order dated 30.08.2011 and the

contract agreement of even date executed between

the employer (NHAI) and the main contractor i.e., the

M/s. KMC-JMC (JV), the 4th respondent herein. It is

also fairly admitted by the Revenue that the amounts

so deducted at the hands of the main contractor are

lying in the account of the main contractor and to his

credit and the same are evidenced by the tax returns

filed in Form VAT-120 and produced by the

Revenue/official respondents under memo dated

10.08.2017. The fact that the main contractor has

not claimed any refund is admitted by the affidavit

dated 04.04.2019 filed into Court by the 3rd

respondent. The fact remains that it is this amount

- 36 -

that is lying in the credit of main contractor is

requested to be adjusted towards the tax demand

raised against the petitioner/sub-contractor and it is

also an admitted fact that though it was a practice

amongst the VAT officers to permit such adjustment

in respect of the tax demands raised against the sub-

contractors, in view of the TDS in the hands of the

main contractors and which practice came to be

prohibited by the said Circular. It is also an

undeniable fact that the appellate authority under

Section 62 of the KVAT Act, is none other than the

authority prescribed under Section 2 (24) of the Act

to mean an officer of the Commercial Taxes

Department, authorized by the Government or the

Commissioner to perform such functions as may be

assigned to him.

42. On a plain reading of the above definition

in conjunction with Rule 148 of the 2005 Rules,

makes it apparent that the appellate authority is an

officer subordinate in rank to the Commissioner and

- 37 -

such Officer acts as an appellate authority on the

authorization by the Commissioner. In that view of

the matter, we are of the considered opinion that the

law laid down by the coordinate bench in the case of

Ashok Agencies referred supra is squarely applicable

in the facts of the instant case also and hence, we

hold that the writ petition is maintainable as the

remedy of appeal is not an efficacious remedy in the

peculiar circumstances of the case.

43. This legal position is also fairly admitted

by the respondents and hence the impugned order of

the learned Single Judge requires to be set aside and

is set aside and the point for consideration with

regard to maintainability is answered in favour of the

petitioner.

44. With regard to the other point formulated

for consideration by the bench, we proceed to

adjudicate the same in view of the singular fact that

there is no dichotomy in the facts involved in the writ

petition. There being no factual disputes and the

- 38 -

parties being at ad idem and the only legal issue

being required to be addressed by this Court being

the liability of the petitioner to comply with the

demand by the Revenue Authorities, we proceed

further in the matter.

45. At the cost of repetition, it is once again

reiterated that the parties are not at variance with

regard to the factual aspect relating to the tax

liability arising out of the contract agreement and

work order executed between the NHAI and the

principal contractor (4th respondent) on 30.08.2011

and the contract agreement dated 14.09.2011

executed between the main contractor (4th

respondent) and the sub-contractor (petitioner). In

this regard, the learned Senior Counsel has placed

reliance on the ruling of the Hon’ble Apex Court

dated 05.09.2016 rendered in the case of Larsen &

Toubro Limited Vs. Additional Deputy Commissioner

of Commercial Taxes and another rendered in Civil

- 39 -

Appeal No.2318/2013 and Civil Appeal

No.7241/2016.

46. As in the instant case, the appellant in the

case stated supra was carrying on the business of

engineers and contractors and was awarded the

contract of constructing Sree Kanteerava Indoor

Stadium at Bengaluru and the assessee in turn

entrusted the work of laying foam concrete to one

M/s.Llyod Insulation (India Limited) i.e., a portion of

the work was sub contracted and who admittedly

was also registered with the Deputy Commissioner of

Commercial Taxes, Assessment-IX City Division,

Bengaluru, and 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 KST Act.

The assesse M/s. Larsen & Toubro Limited (for short

L and T) raised a claim 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

- 40 -

under Section 6-B cannot be taxed there being only

one taxable event for the purpose of Article 366

(29A)(b) of the Constitution of India. In effect the

contention of the assessee was that the 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

Act. The contention came to be negatived. The

Assessing Officer as well as the Appellate Tribunal

and this Court also ruled against the assessee

thereby affirming the view taken by the Revenue.

The said judgment dated 03.02.2006 was carried in

appeal in Civil Appeal No.2956/2007 and the

subsequent appeal is on account of the similar

treatment meted out to the assessee and the Civil

Appeal No.7241/2016 was an appeal by the Revenue

on account of this Court having held that the value

of the work awarded to the sub-contractors cannot

be included for computing the total turnover of the

assessee and the assessment in respect of the said

- 41 -

year was answered against the Revenue contrary to

the earlier view.

47. The Hon’ble Apex Court while determining

the issues arising in the above appeals has placed

reliance on its own ruling rendered in the case of

STATE OF ANDHRA PRADESH VS. LARSEN AND

TOUBRO LIMITED AND OTHERS reported in 2008

(9) SCC 191. The Apex Court has noted that the

Revenue has made an attempt to contend that the

provisions of the State Act are not on pari materia

with the provisions of the Andhra Pradesh

enactment. The Hon’ble Apex Court after adverting

to certain provisions of the Karnataka Act namely

Section 2 (i) (t) and 2 (i) (u-1), (u-2) and (v) and

provisions of Section 5-B and 6-B formulated the

following question as requiring determination by the

Court:

“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

- 42 -

sub-contractor are to be included while

calculating the total turnover?”

48. After formulating the above question for

determination, the Hon’ble Apex Court proceeded to

place reliance on Rule 6 which deals with

determination of total and taxable turnover, more

particularly clause (c) which are extracted 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”

and proceeded to answer the question in the

following manner and in the course of the same has

observed in paragraphs 18 and 19 and thereafter

concluded that the raison d’etre of its ruling

rendered in the case of State of Andhra Pradesh Vs.

Larsen and Toubro will apply in full force in the

- 43 -

context of the Karnataka Act also and further held in

paragraph 20 as follows:

“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 consequent, 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.”

49. After a reading of paragraphs 18 & 19, we

can safely conclude that answering the second point

for determination in favour of the assessee should

not detain us for long.

50. The Apex Court while dealing with the

issue of transfer of property in goods, which is

involved in the execution of the works contract, has

held, that the same has to be treated as total

turnover. It further observed that transfer of

property in goods becomes a necessary event and

unless there is a transfer of property, the amount

paid is not to be included in the total turnover. It

- 44 -

has further held that a taxable event is the transfer

of property in goods involved in the execution of a

works contract and that the said transfer of property

in goods takes place when the goods are

incorporated in the works.

51. It is apparent that the above ruling has

been rendered under the KST Act, 1957. In that view

of the matter we are required to examine as to

whether the proposition of law so unambiguously

declared by the Hon'ble Apex Court is applicable to

the instant case in the light of the provisions of the

KVAT Act, 2003? In this regard we are required to

examine certain provisions of the 2003 Act, i.e.,

Section 2 (12) – “Dealer” means any person who carries

on the business of buying, selling, supplying or distributing goods, directly or otherwise, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration, and includes.

Section 2 (12) (g) - a person engaged in the business of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

Section 2 (29) - “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, charge or pledge) by one person to another in the course of trade or

- 45 -

business for cash or for deferred payment or other valuable consideration and includes.

(a) xxxx (b) a transfer of property in goods (whether as goods or in

some other form) involved in the execution of a works contract; Section 2 (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.

Section 2 (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 4 (1) Every dealer who is or is required to be

registered as specified in Sections 22 and 24, shall be liable to pay tax, on his taxable turnover,

(a) xxxx (b) xxxx (c) - in respect of transfer of property in goods (whether as

goods or in some other form) involved in the execution of works contract specified in column (2) of the Sixth Schedule, subject to sections 14 and 15 of the Central Sales Tax Act, 1956 (Central Act 74 of 1956), at the rates specified in the corresponding entries in column (3) of the said Schedule.

Section 4 (6)

- 46 -

(a) - a registered dealer whose sale of such goods is not liable to tax under sub-section (5), shall be eligible for refund or adjustment of any amount of tax collected on his purchase, which is in excess of the tax payable on his turnover relating to sale of such goods, and the burden of proving that the tax has been collected and paid in accordance with the said sub-section shall be on the dealer;

Section 7 (1) - Notwithstanding anything contained in the Sale of

Goods Act, 1930 (Central Act 3 of 1930), for the purpose of this Act, and subject to sub-section (2), the sale of goods shall be deemed to have taken place at the time of transfer of title or possession or incorporation of the goods in the course of execution of any works contract whether or not there is receipt of payment:

Provided that where a dealer issues a tax invoice in

respect of such sale within fourteen days from the date of the sale, the sale shall be deemed to have taken place at the time the invoice is issued.

Section 9-A - Deduction of tax at source (in case of works

contract) (1) Notwithstanding anything contained in this Act, the

Central Government, or any State Government, or an industrial, commercial or trading undertaking of the Central Government or of any state, or any such undertaking in joint sector or any other industrial, commercial or trading undertaking or any other person or body as may be notified by the Commissioner from time to time or a local authority or a statutory body, shall deduct out of the amounts payable by them to a dealer in respect of any works contract executed for them in the State, an amount equivalent to the tax payable by such dealer under the Act.

Section 9-A (5) - The authority making deduction under

sub- section (1), shall send every month to the prescribed authority a statement in the prescribed form containing particulars of tax deducted during the preceding month and pay full amount of tax so deducted by it within twenty days after the close of the preceding month in which such deductions were made and the amount so payable shall for the purposes of Section 42 be deemed to be an amount due under this Act.

- 47 -

Section 9-A (10) - Where tax in respect of the works

contract is remitted under sub -section (5), the tax payable by the dealer for any period, 3[xxxx] shall be reduced by the amount of tax already remitted under the said sub-section.

(the underlining and emphasis is by Court)

Section 9-A (11) - The burden of proving that the tax on such works contract has already been remitted and of establishing the exact quantum of tax so remitted shall be on the dealer claiming the reduction of tax under sub-section (10).

52. We have carefully analyzed the various

provisions of the Act. Section 4 is the charging

section thereby enabling the collection of tax. Sub-

section 1 (c) pertains to works contract. From a

reading of the provision it is apparent that what is

chargeable to tax is the taxable turnover of a dealer

and in so far as it relates to a works contract, clause

(c) refers to a “transfer of property in goods involved

in the execution of of works contract. In other

words, in the wisdom of the legislature, the taxable

event must involve a transfer of goods.

53. We now proceed to examine the various

provisions extracted hereinabove in order to

- 48 -

determine the taxable event in the circumstances of

the case.

54. Section 2(12) defines a dealer to mean a

person who buys, sells, supplies or distributes goods,

either directly or indirectly thereby implying that a

person to answer the description of a dealer must

indulge in the transfer of goods in either one of the

modes detailed in the provision. Clause (g) deals

with works contract and also refers to a transfer of

property.

55. Section 2(29) defines Sale to mean, every

transfer of property goods. Clause (b) pertains to

works contract and the reference is to transfer of

property. Similarly Section 2(36) defines “Turnover”

to mean the aggregate of amount for which goods are

sold, or distributed or delivered or otherwise

disposed off. In essence it refers to a transfer of

property or goods. Section 2(37) defines “works

contract” as an agreement for carrying out certain

- 49 -

works for cash or deferred payment or other valuable

consideration, i.e., towards the transfer of the

property to the beneficiary or the accretion of goods

in his hands. Yet again the accent is on the transfer,

either by way of transfer or accretion.

56. Further, clause (a) of sub-section 6 of

section 4, of the Act is an enabling provision whereby

a dealer who is not liable to tax is entitled to seek

“adjustment” of any amount of tax collected on his

purchase and which is in excess of the tax payable

on his turnover relating to sale of goods. Thus

emphasis is on the sale or transfer.

57. Another provision of interest and

relevance is the provisions of clause (b) of subsection

(1) of section 6 which deals with the place of sale of

goods. The clause deals with the case of

unascertained or future goods and the place of sale

is said to occur at the time of appropriation. Section

7 deals with the time of sale of goods and sun-

- 50 -

section (1) and the provision determines the same as

being the time of transfer of title or possession or

incorporation of the goods. The moot point here is,

whether the incorporation ought to be understood as

having occurred at the time of mere use of goods or

on the delivery of the future goods or in other words

the certification of the use of goods or the future

goods. It is also relevant to note that the Act merely

defines “Goods” and the Act does not define ‘future

goods’. In that view of the matter and in the context

of a works contract it could be gainfully argued as

the completed piece of work or completed contract.

58. On a cogent reading of the above

provisions it can safely be deduced that the law

makers in their wisdom have emphasized on the

event of “transfer” as being the exigible event. If that

be so, then for a dealer to be made liable for payment

of tax there should be ‘a transfer of property or

transfer in goods’. In the absence of such transfer, it

would be erroneous to conclude otherwise. If that be

- 51 -

the inference that can be drawn, then in a works

contract, more particularly in respect of a sub-

contractor, the trade practices as a normal rule do

not evidence transfer of goods or property as between

the Main Contractor and the sub-contractor. The

transfer is effected between the main contractor and

the employer (owner) only, unless the contract

otherwise stipulates. As a normal practice the

transfer or accretion of goods happens in the hands

of the main contractor only and also the main

contractor can neither become the owner or the

holder of the goods or property. The transfer can

occur only on the acceptance or transfer or

expression of satisfaction the works contract by the

employer/owner. If it were to be interpreted

otherwise it could lead to a absurdity resulting in

double taxation. No doubt double taxation is

permissible if expressly provided by the Act. A

reading of the Act does not make it apparent nor is

the revenue made out such a case. If the

interpretation as placed by the revenue is accepted

- 52 -

then the same work would suffer tax at the hands of

the main contractor, when the sub-contractor

completes the execution of that work contracted and

the same work would also suffer tax at the hands of

the employer when the goods or the work is handed

over or transferred to the Owner/Employer.

59. The facts involved in the instant writ

petition are marginally different, in that the set off or

adjustment is claimed by the sub-contractor whereas

in the case of L & T, the claim was by the main

contractor itself. The main contractor i.e., the L & T

was seeking absolution of tax liability on account of

the tax compliance made by the sub- contractors.

60. In the instant case, the facts involved are

in the converse. The dealer seeking relief is the sub-

contractor and the 4th respondent is the main

contractor. The facts pertaining to award of work,

the sub-contract under agreement dated 14.09.2011

and the execution of the work by the sub-contractor

are all admitted facts. It is also pertinent to note

- 53 -

that the sub-contractor is one of the two constituents

constituting the main contractor which is admittedly

a joint venture, and entirely formed for the purpose

of executing the works contract awarded under the

contract dated 30.08.2011. It is an admitted fact that

all throughout the execution of the project spread

over several years, the RA bills were raised by the

main contractor and the payments were released by

the employer to the account of the main contractor

and TDS was suffered in the hands of the main

contractor only. The fact also remains that the all

along the work was admittedly executed by the sub-

contractor. In that view of the matter, we have no

hesitation in concluding that the taxable event

occurred in the hands of the main contractor, as the

transfer of property or accretion of goods and

transfer of property in favour of the employer was on

the event of the main contractor submitting the RA

bills claiming. Thus, the taxable event being the

accretion of goods as held by the Apex Court in the

case of L & T having happened between the 4th

- 54 -

respondent and its employer, no taxable event

occurred at the hands of the petitioner, rendering it

liable to tax as contended by the Revenue.

61. In the instant case, the accretion of goods

and/or transfer of property occurring to the employer

on the submission of the running account (RA) bills

by the main contractor, we conclude that the taxable

event occurred on the presentation of the RA bills by

the main contractor only and satisfaction of the Bills

by the employer to the main contractor in lieu of the

RA bills. It is a fact that no bill has been raised by

the sub-contractor as against the employer nor is it

the case of the Revenue that the employer has made

any payments to the sub-contractor. It is not the

case of the Revenue that accretion of goods or

transfer of property to the employer has occurred in

the hands of the sub-contractor/the petitioner

herein. Had such a case being demonstrated that

the accretion of goods and transfer of property in

favour of the employer had been at the hands of the

- 55 -

sub-contractor, then in the light of the law laid down

by the Hon’ble Apex Court in the case L & T, the

taxable event would have been at the hands of the

sub-contractor. It is also not the case of the Revenue

that the Main Contractor can step into the shoes of

the Owner. We conclude so in the light of the

provisions of sections 6 & 7 of the Act. We make it

clear that the conclusion in respect of the taxable

event will not exempt the dealer from submitting his

returns or circumscribe the rights of the Revenue to

seek for accounts and details as enabled under the

Act.

62. In the instant case, the facts are peculiar.

The execution of the contract is undoubtedly by the

petitioner who again is admittedly is a sub-

contractor. The RA bills or the running account bills

have admittedly been raised by the main contractor

and payments in lieu of the running bills are made in

favour of the main contractor only and TDS is at the

hands of the main contractor only and consequently

- 56 -

the accretion of goods to the employer happened at

the hands of the main contractor only. That being

the case, the taxable event happened at the hands of

the main contractor only. In that view of the matter,

the accretion of goods and transfer of property being

the taxable event, the same was at the hands of the

main contractor and TDS has been suffered in the

hands of the main contractor and there being no

taxable event in the hands of the sub-contractor, we

are of the considered view that in the light of the law

laid down by the Hon’ble Apex Court as stated supra,

the writ petition requires to be allowed.

63. Accordingly the writ petition is allowed in so

far as it relates to the works contract covered under the

contract agreement dated 30.08.2011 and 14.09.2011.

Consequently, the tax demands raised by the revenue

requires to be reworked accordingly in the light of the

observations made above. Consequently, Annexures-C , D

and F stand quashed.

- 57 -

64. It is also made clear that the above order

allowing the writ petition will enure to the benefit of the

writ petitioner in so far as it relates to the scope of work

covered under the contract agreement dated 14.09.2011

only. In the light of the above, liberty is granted to the

revenue to reassess the liability of the petitioner in so far

as it relates to the inter-state and URD purchases made

by the petitioner. In the light of the above order passed,

there shall be no order as costs.

65. This Court though has not entered into and

adjudicated the validity of Rule 44 (3) (f) of the Karnataka

Value Added Tax Rules, 2005, yet this Court is

constrained to observe that, if the interpretation placed by

the Revenue as set out in the impugned Circular is

accepted, it would virtually result in the main contractor

also stepping into the shoes of a TDS authority as defined

under Section 9-A (1) of the KVAT Act, 2003 and in such

an event, the main contractor would also be required to

make deductions at the time of making payment as

provided under Section 9-A (1) and remit the same in

- 58 -

compliance of the provisions of Section 9-A (5) of the Act.

Further, the Circular is also contrary to the provisions of

Section 9-A (10) and (11) which reads as under:

“9-A (10) Where tax in respect of the works

contract is remitted under sub-section (5), the tax

payable by the dealer for any period, shall be reduced

by the amount of tax already remitted under the said

sub-section.

9-A(11) The burden of proving that the tax on such

works contract has already been remitted and of

establishing the exact quantum of tax so remitted shall

be on the dealer claiming the reduction of tax under sub-

section (10).”

66. Section 9-A(10) provides that where tax in

works contract has been remitted under Section 5,

the tax payable by the dealer for any period shall be

reduced by the amount of tax already remitted and

the word ‘dealer’ as defined under Section 2 (12)

takes within its sweep even a sub-contractor, and we

conclude so in view of the language employed in

clause (g) of sub Section (12) of Section 2.

67. Admittedly, the petitioner is a sub-

contractor and 9-A(11) enables such a dealer to

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demonstrate that the tax on such works contract has

already been remitted. Hence, prima facie the

applicability of Rule 44 (3) (f) to works contract and

cases of sub-contractor prima facie appears to be

contrary to the provisions of Section 9-A (10) and

(11). We also draw succour in favour of our

conclusion in the light of the provisions of Rule 6 of

the Karnataka Sales Tax Rules which pertains to

determination of total and taxable turnover. If the

distinction as set out in Rule 6 are read in

conjunction with the provisions of Rule 9-A (10) and

(11) of the KVAT Act, 2003, then the only inescapable

conclusion that one could arrive, at is that the rigors

of Rule 44(3)(f) are inapplicable in respect of assesses

who execute works contract as sub-contractors as in

the instant case and sub-contractors form the

excepted class. We are of the view that the assesses

who fall within the scope of Section 9-A(10) and (11)

are excepted from the applicability of Rule 44(3)(f).

As no challenge is mounted to the validity of Rule

44(3)(f) and the impugned Circular being purportedly

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in exercise of the powers vested in the Commissioner

of Commercial Taxes under Section 59 of the Act, we

are unable to grant the relief sought for by the

petitioner in respect of the impugned Circular.

Accordingly, the writ petition in so far as it relates to

the prayer (d) stands rejected. Though we have

rejected the relief, but at the same time, we would

like to add a word of caution to the Revenue with

regard to the log-jam the circular could cause. If the

circular is implemented in letter and spirit and Rule

44(3)(f) is interpreted in the manner as made out in

the circular, we are of the opinion that it would lead

to duplication of work, whereby the staffers would be

assessing the same work, admittedly executed by one

dealer, in the hands of two dealers, which would only

mean duplication of assessment work, which is

admittedly an onerous task, thereby leading to

avoidable delays in revenue collections. It cannot be

denied that if two dealers declare the same taxable

event then one of them would be entitled to refund

which again is a separate process and which process

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can be achieved by reference to the returns by the

other. The assessment of the two dealers could be by

two different A.O.’s and could easily lead to

conflicting opinions and thereby the assessee taking

technical advantage of such conflicting opinion.

The writ appeal is ordered accordingly.

Sd/- JUDGE

Sd/- JUDGE

Rsh/jm/-