As per the
judgment delivered by the Hon’ble Supreme Court of India in the case of Larsen
& Tourbo Limited the transactions of construction activity for prospective
buyers are subject to VAT as these are covered under the category of works
contract but still there are certain restrictions for the states while levying
the tax on certain transactions pertaining to works contract as per the
judgment of Hon’ble Supreme Court Of India delivered in the case of State of Jharkhand & Others VS. Voltas
Ltd. & Gannon Dunkerley & Co. VS. State of Rajasthan, Rule 15 &
law laid down on the issue of interstate purchase will definitely come to the
rescue of builders while determining the tax liability as it will support in
reducing the tax liability. Here it is worth while to discuss that agreement
between parties will play vital role in determining taxability under the VAT.
Hon’able Supreme Court of India has upheld the view
taken in K Raheja Case on the issue of Flats where agreements entered into
between developer & prospective purchasers are subject to VAT but if the
agreement is entered into after the unit is already constructed then there
would be no works contract and simultaneously if the agreement is entered prior
to the construction then it amounts to works contract while delivering the
judgment in the case of Larsen & Tourbo Limited vs. State of Karnataka. Beside
this Court has held that in case there
is termination for a particular unit and the same is not resold but retained by
the developer there would be no works contract, it was also held that the
definition of works contract :
“works
contract” includes any
agreement for carrying out, for cash, deferred payment or other valuable
consideration, building ,construction, manufacturing, processing, fabrication,
erection, installation, fitting out, improvement, modification, repairs or commissioning
of any movable or immovable property;
States are not competent to levy tax on transfer of goods in
works contract in the course of Interstate trade :
That the law is well settled by now. Inter–State
purchase of goods meant for use in the execution of works contract cannot be
subjected to levy tax under the Punjab Value Added Tax Act, 2005. The Hon'ble
Supreme Court of India in the case of Gannon Dunkerley & Co. vs. State of
Rajasthan reported as (1993) 88 S.T.C. 204 at page 231 has held as under:–
“it is not permissible for the State Legislature to make a law imposing
tax on such a deemed sale which constitutes a sale in the course of inter-State
trade or commerce under Section 3 of the Central Sales Tax Act or an outside
sale under Section 4 of the Central Sales Tax Act or sale in the course of
import or export under Section 5 of the Central Sales Tax Act. So also it is
not permissible for the State Legislature to impose a tax on goods declared to
be of special importance in inter-State trade or commerce under Section 14 of
the Central Sales Tax Act except in accordance with the restrictions and
conditions contained in Section 15 of the Central Sales Tax Act.
The Hon'ble Supreme Court of India further held that:–
The location of the situs of the sale in sales tax legislation of the
State, would, therefore, have no bearing or the chargeability of tax on sales
in the course of inter-State trade or commerce since they fall outside the
field of legislative competence of the State Legislatures and will have to be
excluded while assessing the tax liability under the State legislation.”
Further the Hon’ble Gauhati High Court in the case
of Projects and Services Centre vs. State of Tripura reported as (1991) 82
S.T.C. 89 (Gau) has held as under:–
“In view of the aforesaid decisions of the Supreme Court it is clear that
the sale in the instant case was an inter–State sale. The fact that the use of
the materials was made in a works contract in the State of Tripura did not in
any way affect the inter–State nature of the transaction. Evidently, the
decisions of the Superintendent of Taxes holding the sale in the instant case
as intra–State sale on the ground that the property therein passed to the buyer
in the State of Tripura goes counter to the law laid down by the Supreme Court.
As indicated above, the place of delivery or the place where the property in
the goods passes is not material for determining whether the sale was an
inter–State sale.”
Similar view has been taken by the Hon’ble Allahabad
High Court in the case of Commissioner, Trade Tax vs. Indus Food Products and
Equipments
Limited reported as (2009) 34 PHT 25 (All.), wherein the following has
been held:–
“Where the property and goods brought from outside the State can be
ascertained and amount representing the sale value of goods covered by Section
3, 4 and 5 of Central Sales Tax Act, 1956 can be separated from the cost of
fabrication and transfer of goods, the State does not have the authority to
levy trade tax on such goods. Section 3F charges tax on the right to use any
goods or goods involved in the execution of works contract in the State of UP.
The goods brought from outside the State and covered by Section 3, 4 and 5 of
the Central Sales Tax Act, 1956 would not be subject to tax, even if they are
included in the execution of the works contract. The fact the nature of the
works contract provided for transfer of the property and the goods after they
were fabricated and the trial run was complete, would by itself not amount
transfer of the fabricated goods, in the State of UP.”
In the above judgment earlier
judgment of the Division bench of the Allahabad High Court in the case of
Santosh and Co., New Delhi vs. CST reported as 1999 NTN (Vol. 15) 604 stands
relied upon.
It may be added that the definition of the term
“sale” under the Central Sales Tax Act, 1956 was also substituted vide Finance
Act, 2002 w.e.f. 11.05.2002 by deeming fiction transfer of property in goods
(whether as goods or in some other form) involved in the execution of works
contract is included in the definition of the term “sale”. This further
supports the above view.
Important
Rules under the Punjab Value Added Tax Rules, 2005 in relation to Works
Contract:
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Rule 15. Determination of taxable turnover by a person.—
(1) To
determine the taxable turnover of sales, a person, shall deduct from his
gross turnover of sales, the following :-
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(a)
turnover of sales of goods, declared tax free under section 16 of the
Act;
(b)
turnover of sales of goods, made outside the State or in the course of
inter-state trade or commerce or in the course of import of goods into or
export of goods out of the territory of India under section 84 of the Act;
(c)
turnover of goods, sent on consignment basis or branch transfers;
(d)
amount, charged separately as interest in the case of a hire-purchase
transaction or any system of payment by installments;
(e)
amount, allowed as cash discount and trade discount, provided such
discount is in accordance with the regular trade practice;
(f)
sale price of taxable goods where such sale was cancelled:
Provided
that the deduction shall be claimed only, if the person is in possession of
all copies of VAT invoice or Retail invoice.
(g)
sale price, in respect of any
goods , returned within a period of six months:
Provided
that a taxable person shall claim the deduction only on the basis of debit
note, issued by the purchaser for the goods returned; and
(h)
a sum, to be calculated by
applying a tax fraction in case, gross
turnover includes retail sales.
(2) The
deduction referred to in clauses (e),
(f) and (g) of sub-rule (1), shall be claimed in the tax period in which the
event occurs:
Provided
that if the turnover of the period is less than the claim, then the balance
of such deduction, shall be claimed in the immediate subsequent period.
(3) The provisions of clauses (a) to (g) of
sub-rule (1), shall also apply for determination of taxable turnover of
purchases for levy of purchase tax under sections 19 and 20 of the Act.
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(4) The value of the goods, involved in the
execution of a works contract, shall be determined by taking into account the value of the entire works
contract by deducting there-from the
components of payment, made towards labour and services, including ─
(a) labour
charges for execution of the works;
(b) amount paid to a sub-contractor for labour
and services;
(c) charges for planning, designing and
architect’s fees;
(d) charges for obtaining for hire, machinery
and tools used for the execution of the works contract;
(e) cost of consumables, such as, water,
electricity and fuel, used in the
execution of the works contract, the property, which is not transferred in
the course of execution of a works contract;
(f) cost of establishment of the contractor
to the extent, it is relatable to the
supply of labour and services;
(g) other similar expenses relatable to supply
of labour and services and;
(h) profit earned by the contractor to the
extent, it is relatable to the supply of labour and services.
(5) The amounts deductible under sub clauses
(c) to (h) of sub rule (4), shall be determined in the light of the facts of
a particular case on the basis of the material produced by the contractor.
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Rule 46. Liability of persons in case of works
contract.--(1) A person
entering into a contract with a contractor or a contractor entering into a
contract with a sub-contractor for transfer of property in goods in execution
of a works contract, shall furnish to the commissioner or the designated
officer, particulars of such contract in Form VAT-25 within a period of
thirty days from the date of entering into such contract.
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(2) A
person entering into a contract with a contractor or a contractor entering
into a contract with a sub-contractor for transfer of property in goods for
execution of a works contract, who is also liable for deduction of tax, shall
within a period of thirty days of accruing his liability to deduct the tax,
make an application, complete in all respects to the designated officer in
Form VAT-26, for allotment of tax deduction number. The designated officer
shall allot tax deduction number to the person concerned within a period of
seven days from the receipt of the application.
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(3)
The tax deducted under the Act, shall be deposited by the person
deducting the tax through a challan in Form “VAT-2” in the appropriate
Government Treasury within a period of fifteen days from the close of each
month.
A monthly statement of the deposits made under
sub-rule (3), shall be furnished by the persons concerned in Form “VAT-27” along
with the proof of payment within a period of fifteen days after the date of
deposit.
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CIRCUMSCRIBING
LAW:
In a Judgment by the apex court in the case of Raheja Corporation , the owner of the
flats were engaged in the business of constructing residential apartments and/
or commercial complexes and for this purpose, they entered into agreements of
sale with the intended purchasers. It was held that even an owner of the
property also might also be said to be carrying on a works contract if he
enters into the agreement to construct. However if the agreement is entered
into after the unit is already constructed, then there will no works contract.
But so long as the agreement is entered into before the construction is
complete, it would be works contract.
Raheja,
Development Corporation vs. State Of karnatka, 2005 NTN, (Vol. 27) 243; 2005 (5) SCC 162
The appellant
, which carried on the business
of real estate development and allied
contacts, entered into development agreements with owners of lands. It got the
plans sanctioned and after approval
constructed residential apartments
and/or commercial complexes. In most cases before construction it
entered into agreements with the intending purchasers The agreement providing
that on completion of the construction the residential apartments or commercial
complexes would be handed over to the
purchasers, who would get an undivided interest in the land also. The Appellant
was entitled to terminate the agreement & dispose of the unit if beach was
committed by the purchaser. The owners of the land would transfer the ownership
of land directly to society which was being formed under the Karnatka ownership
Flats ( Regulation of Promotion of Construction, Sale, management
&transfer) Act, 1974. The question was whether the appellant was a dealer
& liable to pay turnover tax under the Karnataka Sale Tax Act, 1957, In
relation to the Construction contracts with the purchasers as “Works
Contracts”.
The Hon’ble
Supreme Court held that under section 2(1)(v-i) of the Karnatka Sales Tax Act,
the definition of works contract was very wide and was not restricted to works
contracts as commonly under stood, viz, a contract to do some work on behalf of
someone else. It also included any agreement for carrying out either for cash
or for deferred payment or for any other valuable consideration, the building
and construction of any movable or immovable property. The definition took with
in its ambit any type of agreement where in the construction of building took
place either for cash or deferred payment or valuable consideration.
Therefore even
if the appellant was owner to the extent that it had entered into agreement to
carry out construction activity on behalf of someone else for cash, deferred
payment or other valuable consideration. It would be carrying out a works
contracts. For the purpose of considering whether the agreement amounted to
works contract or not the provisions of Karnataka Ownership Flats ( Regulation
of Promotion of Constructions, Sales, Management and transfer ) Act, 1974,
would have no relevance.
The appellant
was undertaking to build for the prospective purchaser on payment of price in
various installments set out in the agreements. Though the appellant was not
the owner it claimed a lien on the property it had the right to terminate the agreement and to dispose of the unit if a
breach was committed by the purchaser. So long as there was no termination the
construction was for and on behalf of purchaser and therefore the agreement remained
a works contract within the meaning of terms as defined in the act, So long as
the agreement was entered into before the construction was complete , it would
be a works contract. However if the agreement was entered into after the flat
or unit was already constructed, there would be no works contract.
Larsen
and Tourbo Limited & Another vs. State of Karnataka & Another 2003 NTN
( Vol. 22) 153; 17 VST 460 (SC):
The Law laid
down by the Hon’ble Supreme Court in K. Raheajs’ case was a subject matter of
challenge before the Hon’ble Supreme Court in the case of Larsen &
Tourbo & another. The Hon’ble
Supreme Court while delivering the judgment on 19.08.2008 in the Larsen & Tourbo case observed that
Be that as it may, apart from the disputes in hand ,the point which we have to
examine is whether the ratio of judgment of the division bench in the case of
Raheja Development Corporation ( Supra ) as enunciated in Para 20, is correct.
If the development agreement is not a
works contract could the department rely on the second contract, which is Tripartite
agreement and the interpret it to be a
works contracts, as defined under 1957 act. Lastly could it be said that
petitioner company “ was the contractor
for prospective flat purchaser. Under the definition of terms of “works
contracts” as quoted above the contractor must have undertaken the works of
construction for and on behalf of the contractor for cash, deferred or any
other valuable consideration, According to the department , development
agreement is not works contract but the Tripartite agreement is works contract
which, prima facie, appears to be fallacious. There is no allegation that the
Tripartite agreement is sham or “bogus.”
In view of
aforesaid findings, the K. Rahejas’ case was referred to the larger bench of
Supreme Court.
In case of
Raheja, The developer had entered into a development agreement with the owners
of the land. They got the plan sanctioned and entered into contract with the intended purchasers. The agreement
provided that on completion of construction of residential apartments, it would
be handed over to purchaser who would get the undivided share in land also. It
is relevant to consider that a developer is principal contractor on behalf of
customer or the prospective buyer , as such , if the developers enters into a
construction agreement with the prospective buyer prior to completion of
construction; the result would be developer to treated as works contractor and
liable to tax being dealer.
Where as in
cases, if the developer enters into an “Agreement for Sale” Or executes sale
deed after construction is complete- it can be contended that such sale is sale
of immovable property not liable to tax under the tax. The ratio laid down in
case of K raheja is also not applicable in the cases where builder does not
under take any construction work for behalf of prospective allottee / buyers. till such time sale deed is not
executed, the lien, right, title and interest including the ownership and
possession in the construction so made remain with the builder. There may not be
work Contract, in cases where land itself belongs to builders or has been
purchased from development authorities. At this Juncture it is pertinent to
point out that payment schedule will not be alter the transaction provided the
lien, right, title, interest including ownership & possession in the construction so made remain with the builder
till execution of sale deed.
Various
instances come to my knowledge where the builders have got themselves
registered under the UPVAT act and purchased VAT goods on its own account
against the tax invoice on which ITC is available and subsequently filed
monthly returns. It is also noted that mere seeking / obtaining registration
will not make builder liable to tax under work contract, provided that he has
not claimed ITC. If the ITC is claimed then certainly he will with in ambit of
work contract.
Assotech
reality Pvt Ltd vs State of UP 2007 NTN ( Vol 34) 67; 2007 UPTC 797 ( ALL).
The Hon’ble
Allahabad high Court in The Assotech case has made an endeavour to set at rest
the controversy arouse at K Rahejas case. The hon’ble court held that:-
The agreement
provided that K. Raheja Development corporation, as developer on its own behalf and as a
developer of such person, would construct the flats as such ultimately belongs
to such person. K. Raheja development
corporation were constructing the unit
for and on behalf of the person who had agreed to purchase the flats. In the
present case we find that petitioner is constructing the flats/ apartments not
for and on behalf of prospective allottees
but otherwise. The payment schedule would not alter the transactions.
The right, title, interest in the construction continue to remain with the petitioner. In other words they are
not subjected to tax under the act and
the action of imposing tax on such constructions treating them to a works
contacts. Is wholly without jurisdiction. We are therefore of the considered
opinion that the impugned orders dated 24.03.2006 and 29.05.2006 passed by the
Assistant Commissioner, trade Tax, Sector-1, Noida, respondent No. 2 insofar as they relate to imposition of tax
on construction of apartments/ houses/ flats and other construction in
question, are wholly without jurisdiction and they cannot be sustained and are
hereby set aside.”
In the nutshell,
in Assotech case the court observed in the K. Raheja case the appellant were
constructing the unit for and on behalf of the person who had agreed to
purchase the flats. Where as in Assotech case the petitioner is constructing
the flats/ apartments not for and on behalf of prospective allottee but
otherwise. The payment schedule would not alter the transaction. The right
title, interest in the construction continue in remain with the petitioner, it
cannot be said that constructions were undertaken for and on behalf of
prospective allottees and therefore the constructions in questions undertaken
by petitioner would not fall under clause (m) of section 2 read with section 3F
of the act, and outside the purview of the provisions of the Act,. Agreement
where in Land & buildings are conveyed to purchaser on payment of stamp
duty were deemed to transfer of immovable properties and not liable to tax.
Aggrieved
against the aforesaid judgment, the state of UP filed a SLP before the Hon’ble
Supreme Court, regulate the matter to to appellate authorities on the following
grounds that the appellant ought to have filed a first appeal. The tribunal on
11.06.2010 allowed the appeal of Assotech Ltd. While allowing the appeal
Tribunal observed that Appellant Assotech has constructed flats on his own
behalf of land purchased by them. No part of land has been transferred to the
prospective buyers. The right, title, interest in the constructions continue to
remain with Assotech.
Against the
order of the Tribunal the department preferred a commercial tax revision before
the Hon’ble Allahabad high Court. The hon’ble court vide order dated 20.09.2012 confirmed that order passed by the
Tribunal dated 11.06.2010 thus setting at rest the controversy arose out of judgment
of K. Raheja.
Even otherwise,
The construction of apartments & sale thereof to the buyers on the basis of advertisements
of invitation to purchase particular flats constructed by the construction
company do not fall in the definition of sale as provided u/s 2(aa) of he act,
where in the word GOODS is used,
whether the flat is goods & if it is not goods but immovable property, the
provision of U.P. Act would not be applicable.
Section 2 (h) of
U.PVAT Act define the dealer which include buying, selling & supplying the
goods but when the flat is not “GOODS” and the construction company does not
sell flats as goods, it do not all in the definition of Dealer:
Thirdly Section
2(au) of the act, defines works contract and it is applicable on those cases
where the construction of any immovable property on behalf of third person as
per contract is undertaken, only in those case it would be works contract
liable to tax. Since in case of
Construction Company not undertaking construction activity on behalf of the
third person or on the basis of
tripartite agreement, rather the flats are constructed in the owned land of
construction company, purchased in his name from the development authority and
got the map sanctioned as per layout plan & park, community center is constructed
for general utility which is not sold to anybody, it do not fall in the
category of works contract
Fourthly, the
flats are sold as per the terms & conditions of allotment letter & till
the entire installment is being paid by the purchaser and the registered sale
deed is executed after paying the stamp duty , both on value of land &
value of super structure, the lien continues with he construction company/
builder.
In case of Ashwani Kumar Tripathi VS. State Of UP reported
in 2005 (4) AWC 3270 where in the division bench of this court was held
that as per section 54 & 55 of Transfer of Property act, It is apparent
that the terms & conditions under
self financing schemes are merely contract of sale without possession and not
the sale with possession as such. Section 55 (1)(d) of T.P. Act makes it clear
that the seller is bound on payment of land without or without super structure
of flat price, to execute a conveyance deed after stamp duty as per provision
of stamp act.
In view of the
discuss it is apparent that the transaction between the builder & buyer is that sale of immovable
property and the property in land as well
as the super structure always
remain with the builder until the execution of sale deed after paying the stamp
duty, only then it will be the transfer of immovable property and there could
be no sale of any immovable property.
In the case of State Of Andhra Pradesh vs. Kone Elevators
( India) Ltd., 2005 NTN (Vol. 27) 5; (140 STC 22) (SC) while reversing the
decision of Andhra Pradesh high Court in State
Of A.P. Vs. Kone Elevators (India) Ltd. (1999) 115 STC 96 is very relevant.
The Supreme Court In Kone’s Case
observed that there is no standard formula by which one can distinguish a
“Contract of sale” from a “Works Contact”. In a “Contract OF Sale” the main
object is the transfer of property and the delivery of possession of the
property, where as the main object in a “contract for work“ is not the transfer
of property but is one for work & labour.
In Judging Whether ( lie contract is for a “sale” or for “Work & Labour”, in the
essence of the contractor the reality of the transaction as a whole has to be
taken into consideration. The predominant object of the contract, the
circumstances of the case and the custom of trade provides a guide in the
deciding whether the transaction is a “sale”
Or “works contract”. Essentially, the question is of
interpretation of the “Contract”
Some what
synonymous to sales tax laws, the service tax department also attempted to levy
the service tax on works contract, but the Tribunal held In the case of Daelim Industrial Company Ltd vs.
CE(1994-2006) STT 438 that such levy is not tenable. Even the revenue filed
appeal before apex court too was dismissed. To overcome the situation, the
finance Act, 2007 has sought to levy the tax on service element in the
specified contracts. The effects of the works contract service was such that if
the specified contract is work contract on which sale tax is payable, the service
will be taxable under works contract service, if the contract is a simple service contract (i.e. either no
material is involved or even if some material is involved and sale tax is not
payable), the service tax will oh under respective heads of taxable service.
Works Contract service for all purposes must satisfy twin condition i.e. there
must be transfer of property in goods involved in the execution of work
contract of specified works contracts; secondly such transfer is leviable to
tax as sale of goods.
In Tax Appeal
No. 1550 of 210 dated 22nd April 2011 in the case of Commissioner Of service Tax Vs. Sujal
developers. The Gujrat high Court
upheld the view of the Tribunal where the respondent assessee was developer who
had developed housing complexes for future sale. The bench held & Observed
as under:
“from the
statutory provision, circulars as well as clarifications issued by the
board referred to here in above. It
appears that for being chargeable to tax under section 65(105)(zzzh) of the act
is that a person concerned should render service to another person in relation
to construction of complex. Thus the basic requirement for falling with in the
ambit of said provision is that there has to be a service provider and a
service receiver. In the present case as noticed earlier, the land on which the
residential complex has been constructed belongs to the society. The society has entered into a
development agreement with the respondent . Under the agreement between the
society and the respondent developer, the
work of construction & development of the housing project has been
entrusted to the respondent, The respondent developer has agreed to develop the
said land by attending the construction and development work and to complete
the scheme duly & diligently on the
terms & conditions contained in the agreement. Under the agreement, the
developer is required to carry out every necessary act to
complete the construction & development of the project directly or
indirectly, includes preparation and approval of plans, getting the buildings
constructed directly or by sub contracting and/ or purchase of material, hiring
labour, arrangement of finance,
marketing and advertising the project, enroll members , collect money etc. the
respondent is permitted to use the property in question for the purpose
mentioned in the agreement. The respondent is entitled to construction and/or
arranges to construct the building as per the plan & specifications
prepared by the Architects. Thus as per the agreements, the respondent
developer is entitled to make construction of land in question, enroll members
as well as collect amount towards the unit allotted to such members. The
finances for the purpose of development
are arranged by the respondent developer. In
the circumstances, from the development agreement, it does not appear
that respondent developer is a contractor who is executing the construction
work on behalf of the society. Here the developer is using its own finances and
developing the land in question & selling the property constructed there on
to the members of the society. Thus in the light of clarifications issued by
the board viz when it is only after the completion of construction. In such a
case any service provided by such seller in connection with the construction of
residential complex till the execution of such sale deed, would be in the
nature of self service and consequently, would not attract service tax.
In case of Magnus Construction (P) Ltd vs. Union of
India 2008 (STT) 9 GAU, it has been held that when title of flats passes to
the customers only on execution of sale deed and its registration; payment made
by the prospective buyer in installment is against the consideration of sale,
it is not construction on behalf of prospective buyers & hence not liable
to service tax.
THE CONCLUSION:
In
nutshell it can be safely concluded that even if the activity of construction
of flats where agreements entered into between developers & prospective
purchasers are subject to VAT but still while determining the liability the
deductions will reduced the tax liability, beside this while constructing flats
there is an involvement of huge quantity of goods which was utilized but still
the same is outside the ambit of taxability as the same was not transferred to
the buyer like stairs, lift, common area, parks, boundary wall etc., so if we
evaluate cautiously then certainly tax liability will reduced. Beside this the
agreement has found it sound importance.
