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Case Study On Sub-Contract


State of Andhra Pradesh & Others Vs Larsen & Tourbo Ltd & Others


[Arising out of SLP (C) No.124825 of 2007]



Facts: Larsen & Tourbo Ltd [L&T] is engaged in execution of civil works contract.  Registered dealer under the APVAT Act.   It entered an agreement with contractee for execution of work.  The same work has been sub-contracted to another registered dealer.


Held: There is only one transfer of property in goods, taking place from sub-contractor to contractee.  There is no transfer of property in goods from main contractor [L&T] to contractee.


Principles: By virtue of Article 366(29A)(b) of the Constitution once the work is assigned by the contractor [L&T], the only transfer of property in goods is by the sub-contractor(s) who is a registered dealer in this case and who claims to have paid taxes under the Act on the goods involved in the execution of works.  Once the work is assigned by L&T to its sub-contractor(s).  L&T ceases to execute the works contract in the sense contemplated by Article 366(29A(b) because 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.  Even if there is no privity of contract between contractee and the sub-contractor, that would not do away the principles of transfer of property by sub-contractor by employing the same on the property belonging to the contractee.  This reasoning is based on the principle of accretion of property in goods.



On going through the above principles the basic question arises whether the concept of ‘Construction Delivery’ can be applied or not?


Yes there is a difference in how the transfer of property is taking place in normal case and in the case of works contract.  Ultimately it has to be concluded that, there is transfer of property in goods.


The transfer of property in goods can be made either by actual delivery of goods or by ‘Constructive Delivery’


‘Constructive Delivery’ is one where there is no actual delivery between the contracted person; but in the law regarded as sale; symbolical delivery.  An act that amounts to a transfer of title by operation of law when actual transfer is impractical or impossible. [as per Advanced Law Lexicon]


Under CST as per section 3(b), the sale can be said to take place by transfer of document of title to goods.  This is nothing but, a ‘Constructive Delivery’.  It is important to mention here that, Hon’ble Gujarat High Court in the case State of Gujarat Vs Haridas Mulji Thakker [1992] 84 STC 317 while deciding the question whether to claim exemption under section 6(2) of the CST Act, for transfer of document of title as mentioned under section 3(b) of the CST Act, whether the actual endorsement is required or not?.  The facts of the case are as under;


A Purchaser in Gujarat placing orders with a dealer in Bombay.  Inturn dealer in Bombay placing orders with supplier in Bombay.  Dealer instructing Bombay supplier to consign specified goods directly to purchaser’s place.  Purchaser in Gujarat taking delivery and paying freight.


Held: It was held that, there were two deliveries which synchronized in point of time, even though both the sales were separate in point of fact and in the eye of law.  When the Bombay supplier transported the goods to Gujarat and took out the receipts in the name of the purchaser in Gujarat, there was ‘Constructive Delivery’ in favour of the respondent dealer.  At the same time there was ‘Constructive Delivery’ of the same goods infavour of the purchasers.


While effecting the second delivery the Bombay supplier acted as agent of the respondent.  The moment the goods were transported and the transport receipts were taken in the name of the Gujarat purchasers, the property in the goods stood transferred in their favour.  The sale was by transfer of documents of title to the goods while the goods were in movement from one State to another although there was no actual endorsement thereon by the respondent.  The second sale was, therefore, an inter-state sale within the meaning of section 3(b) of the Central Sales Tax Act. 1956.


From the above judgement it can inferred that, where there is no physical delivery of goods from one person to another who have contracted for that, it can deemed to be a sale took place from one person to another who have contracted by virtue of ‘Constructive Delivery’

Before get into the complexity of transfer of property in goods under works contract, the facts of the case as discussed in the case of State of Gujarat Vs Haridas Mulji Thakker [1992] 84 STC 317, in the light of the local sale i.e., ‘A’ purchaser, ‘B’, dealer and ‘C’, supplier residing in the same state, and ‘B’ & ‘C’ are registered under the KVAT Law. ‘A’ places an order to supply certain goods to ‘B’.  ‘B’ inturn instructs ‘C’ to deliver the goods directly to ‘C’.


In this case if the theory of ‘Constructive Delivery’ is applied there are two deliveries happening at the point of time, therefore both ‘B’ and ‘C’ are liable to tax as there is no exemption available under KVAT Law as given in section 6(2) of the CST Act, 1956.


The term “document of title to goods” is defined under section 2(2) of the Sale of Goods Act, 1930, as follows;


“’document of title of goods’ includes a bill of lading, dock-warrant, warehouse keeper’s certificate, wharfinger’s certificate, railway receipt, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorizing or purporting to authorise, either by endorsement or delivery or by delivery, the possessor of the document to transfer or receive goods thereby represented”.


1.    In this case whether the sub-contract agreement entered by L&T with sub-contractor is nothing but an authorization given or right given to execute the work on behalf of them in contractee’s place can be considered as document of title or not?




Is it because the tax on works contract is deeming fiction, it cannot be said that another sale is happening from main contractor to contractee? 


2.    Secondly is there any provision to levy tax on the profit element of the main contractor where it is decided that, there is no sale from main contractor to contractee and only the sub contractor is liable to pay tax on the transfer of property to the purchaser?.


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