The Supreme Court has ruled that ownership in building passes by accretion; tax to apply only on actual transfer — not on those who merely facilitate the work.
The bench of Justice J.B.Pardiwala and Justice K.V. Viswanathan has upheld the Karnataka High Court’s ruling that principal contractors executing works contracts under the composition scheme of the Karnataka Value Added Tax Act, 2003 (KVAT Act) are entitled to deduct payments made to registered sub-contractors, provided such sub-contractors have accounted for and paid tax on their turnover. The decision, delivered in the dispute involving the Authority for Clarification and Advance Rulings and M/s Skyline Construction and Housing Pvt. Ltd., brings clarity to the tax treatment of sub-contracting during the period prior to 1 March 2006.
M/s Skyline Construction and Housing Pvt. Ltd. was engaged in the business of executing building construction works contracts in Karnataka and was registered under the KVAT Act. The company executed certain portions of its construction projects through registered sub-contractors and opted for payment of tax under the composition scheme provided under Section 15 of the KVAT Act, which allowed payment of tax at a prescribed percentage of the total contract consideration instead of calculating tax on the value of goods transferred in the works process.
A dispute arose when the company sought clarity on whether the amounts paid to these registered sub-contractors should be included in the taxable turnover while computing tax under the composition method. The company argued that since sub-contractors themselves were liable to VAT and were charging and paying VAT on the portions of work executed by them, including such amounts again in the principal contractor’s taxable consideration would result in double taxation. To resolve this, the company approached the Authority for Clarification and Advance Rulings.
The Authority for Clarification and Advance Rulings, however, rejected the company’s claim. It held that until 31 March 2006, the KVAT Act did not expressly provide for any deduction of payments to sub-contractors when calculating tax under the composition scheme. Accordingly, the Authority ruled that the principal contractor was required to pay composition tax on the entire contract value, including the portion executed by sub-contractors.
Aggrieved, the contractor filed an appeal before the Karnataka High Court. The High Court examined the nature of works contracts and held that the property in goods used in construction is transferred to the property owner through the doctrine of accretion. It observed that when a sub-contractor executes part of the work, the transfer of property in the goods occurs directly from the sub-contractor to the contractee, even if the contractual relationship exists only between the contractee and the main contractor. This meant that the turnover corresponding to the portion of the work executed by the sub-contractor cannot again be taxed in the hands of the principal contractor.
The High Court further held that deduction would be permissible only in cases where the sub-contractor is a registered dealer under the KVAT Act and has paid applicable VAT on the value of work executed. This decision effectively prevented double taxation on the same value of goods in a multi-layered contract structure.
The Karnataka State Revenue authorities appealed the High Court’s decision before the Supreme Court.
The Supreme Court agreed with the High Court’s reasoning and emphasized that in works contracts, the property in goods is transferred not by sale in the traditional sense but by accretion during construction. The sub-contractor directly transfers property in goods to the contractee, and accordingly, the sub-contractor is the one liable to pay VAT on the goods used. Including the value of sub-contracted work again in the main contractor’s composition turnover would amount to taxing the same transfer twice, which is inconsistent with constitutional principles and established legal interpretation.
The Court therefore upheld the position that amounts paid to registered sub-contractors who have paid tax on their turnover must be excluded from the total consideration on which the principal contractor pays composition tax under Section 15(1).
The composition scheme cannot be interpreted to create double taxation. Sub-contracting, an essential commercial practice in large construction projects, should not result in unintended tax burdens when both parties are registered dealers.
By affirming the Karnataka High Court’s interpretation, the Supreme Court has settled a long-standing dispute concerning the tax treatment of sub-contracting under KVAT and ensured that tax liability aligns with the actual transfer of goods involved in the execution of works contracts. The Revenue’s appeal was dismissed, confirming the legality and fairness of allowing deductions for payments made to registered sub-contractors who have discharged their VAT liability.
Case Details
Case Title: Authority For Clarification And Advance Rulings Versus M/S Skyline Construction And Housing Pvt. Ltd.
Case No.: Civil Appeal No. 8318 Of 2011
Date: 9th October, 2025
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