Note on Judgement of Larsen & Tourbo Ltd. Vs. State of Karnataka

NOTE ON JUDGEMENT OF LARSEN & TOURBO LTD. VS. STATE OF KARNATAKA IN RELATION TO THE LAW LAID DOWN IN THE K. RAHEJA’S CASE ON THE ISSUE OF FLATS BY THE HON’BLE SUPREME COURT OF INDIA.

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:

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 reduce. Beside this the agreement has  its own importance.

Authored by

J S Bedi Advocate

Office at Jalandhar

5/13, Central Town, Jalandhar-144001