Kerala High Court rules that VAT cannot be demanded on the profit element of the main contractor where entire contract is executed by sub-contractor

We are pleased to release a Tax Alert on the decision of the Kerala High Court in the case of Surya Constructions vs Commercial Tax Officer and State of Kerala.

The High Court rules that no tax can be leviable in terms of Kerala Value Added Tax Act (KVAT) on the profit element of the assessee when the entire work is sub contracted to a sub-contractor. It holds that there was no sale of material in the course of execution of works contract that emanated from the assessee to the awarder of contract.

The High Court has relied on the decision of the Supreme Court in the case of State of Andhra Pradesh and Other vs Larsen & Toubro and Others, wherein it was held that lack of privity of contract between the awarder of the contract and the sub-contractor would not do away the principle of transfer of property by the sub-contractor.

A much required clarity has been provided on the subject by the ruling.