Introduction Whether builders and developers are works contractors, under sales tax/VAT laws, has chequered history. In the late 1980s when works contract was introduced, there were determination orders passed by the learned Commissioner of Sales Tax, determining that builders were not liable to sales tax (works contract) when they were selling premises to prospective buyers. After the judgment of the Hon’ble Supreme Court in case of K. Raheja (141 STC 168), the Sales Tax Department of Maharashtra took a view that builders were also ‘works contractors’ and liable to tax accordingly. The above position was challenged by preferring writ petitions in the Hon’ble Bombay The High Court. Hon’ble Bombay High Court decided the issue vide judgment in MCHI (51 VST 168) and held that in certain circumstances the builders were also works contractors. This decision was challenged before the Hon’ble Supreme Court. The Supreme Court, along with other matters, decided that the above issue, vide its judgment in case of Larsen & Toubro and others (65 VST 1). In above judgment, the Hon’ble Larger Bench of the Supreme Court confirmed the judgment of the Hon’ble Bombay High Court that builders and developers were works contractors. However, while deciding the issues before it, the Hon’ble Supreme Court also observed that the contract starts from the date of agreement with the prospective buyer and the completed portion prior to the date of such agreement would amount to sale of immovable property, thus such portion could be subjected to sales tax/VAT. Supreme Court also advised for necessary changes in the provisions. ? Amendments made in Rules vide notification dtd. 29.01.2014 To comply with the directions of the Hon’ble Supreme Court in above judgment, Government of Maharashtra amended the rules particularly rule 58(1A) was amended, and, further rules 58(1B) and 58(1C) were inserted. The sum and substance of above amendments was that if the dealer (builder/ developer) claimed deduction for cost of land, it should be allowed as per ready reckoner rate of the concerned land and if higher deduction is claimed, it should be supported by determination of value of land by Department of Town Planning & Valuation. Similarly, for deduction towards constructed portion prior to date of agreement, the rules 58(1B) & (1C) provided a table about stages for deduction and also cast an obligation to support the construction of the said portion by certificate from Local or Planning Authority. For sake of brevity the above rules are not discussed elaborately here.
Fresh Writ Petition challenging the validity of the above rules
Confederation of Real Estates Developers’ Association of India – Maharashtra & others filed writ petition in the Bombay High Court. The said writ petitions are decided vide Writ Petition no. 4520 of 2014 & others dated 30.4.2015. The challenges were to the above rules. The challenges as recorded by the Hon’ble Bombay High Court are reproduced below: –
“5. Grounds of challenge are that the impugned notification and the trade circulars are in express conflict with the observations of the Supreme Court in the case of “Larsen and Toubro Limited vs. State of Karnataka and Another” (2014) 1 SCC 708 and other pronouncements of this High Court and the Supreme Court. It is being submitted that amended Rule 58 fails to arrive at true and correct value of goods at the time of incorporation in the works contract and tends to indirectly tax immovable property and along with goods. Though Rule 58 (1A) makes allowance for deduction of cost of land, it compels determination in accordance with guidelines appended to Annual Statement of Rates, prepared under the provisions of Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 (Hereinafter referred to as Bombay TMV Rules, 1995), as would be applicable on 1st January of calendar year in which agreement of sale is to be registered, and as such, profit relatable to transfer of land would not be deductible from the total contract value. The Amended Rule 58 (1A) of the MVAT Rules also does not give allowance to deductions on account of consideration for acquisition of FSI/TDR, payments towards eviction of tenants, clearance of encroachment on land. While Rule 58 (1) (h) permits deduction of profit relatable to supply of labour and service, amended rule does not provide for profit relatable to third element, namely, the land and the object of taxing of value of goods at the time of incorporation, as such, gets blurred. Trade Circular dated 21st February, 2014 restricts options to only one from the four methods given and no other option such as, ‘cost plus gross profit’ is admissible. Various other arguments have been advanced to contend that the Rule is deficient to provide for many things involved. Arguments are also advanced contending that Trade Circulars tend to be ambiguous and do not clarify many issues while they purport to answer the questions. According to the petitioners cost plus gross profit method is viable and practicable.
6. The petitioners further contend that Rule 58 (1B) of the MVAT Rules, seeks to enact a wide and arbitrary categorisation. Stage wise percentage provided under rule 58 (1B) has no basis, either for stage or for percentage of construction. According to them, percentage of material on which taxes are sought to be levied is on higher side and it is unfair and unconstitutional. The percentage prescribed is not in tune with ground realities and technical considerations. According to the petitioners, though prescription of table has been modelled on recommendations of Public Works Department, the same is insufficient and would not be applicable to the cases of developers. There is huge difference in the contracts with the Public Works Department and the nature of work of the developer, viz., Public Works Department contract provides for escalation, which is not the case with the developer. It is further contended that presumptions underlying the table under rule 58 (1B) that work is done on site as per stage given, yet it would not necessarily represent the way construction is carried out, in stages and in the sequences, for, it may be combination of various stages or activities may be simultaneous and as such, the table would not be able to give correct determination of value of work done at the time of entering into an agreement.”
There were elaborate arguments, which were considered by the Hon’ble Bombay High Court. Assuming that there may be some chances that valuation of goods may not be correct or some portion of immovable property may get taxed, the overall view of the Hon’ble High Court is that the rules are for uniformity and hence cannot be said to be invalid or unconstitutional. The Hon’ble High Court recorded its reasons, amongst others in following words:- “62. This Court is to consider validity of provisions valuing taxable goods for the purpose of charging duty. While enacting a measure to serve as a standard as levy, the legislation may not contour it along with the lines which spell out the character of the levy itself. Viewed from this standpoint, it is not possible to accept the contention that because the levy of MVAT is a levy on transfer of goods in a works contract, the value of goods must be limited to cost plus profit. The broader based standard may be adopted and would be within authority and power of legislation. A standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of levy.
63. There is further consideration that the value shall be arrived at, assessed and ascertained on the modality as has been referred to under Rule 58 (1) (1A)and (1B) of the MVAT Rules. The value is a measure of tax and Rule 58 provides for determination of value of goods to be arrived at after deductions therefrom, referred under the rules/formulae. Values and items as referred to under Rule 58 (1), 58 (1A) and 58 (1B) are criteria for computing value of subject of tax at various stages as have been referred to under the Rules. Table under Rule 58 (1B) specifies the stages and value at the stages. The computation of value is to be done in accordance with the terms of the same. It is intended to determine value of goods and provides basis for determining such value.
The value has to be ascertained and determined in such a manner as is prescribed and shall be value of the subject of tax for the purpose of charging MVAT. The legislature, while enacting amended rules, did not intend to create a scheme materially different from the one in the previous rule 58 (1A) of the MVAT Rules. The object and purpose remained the same and so did original principle at the core of the scheme, and has been made more flexible and wider.
64. The first essential characteristic of MVAT is it is a tax on transfer of property in goods, secondly, uniformity of incidence is also a characteristic of the tax and thirdly the collection of tax. MVAT can be imposed on assessable value determined with reference to transfer of goods at the stage as referred to in the table. It is legislature’s power to legislate in respect of the basis for determining the measure of tax. The computation being made strictly in accordance with the express provisions under the rules, there is no warrant for confining the value as sought to be submitted by the assessee. It is open for the legislature to adopt any basis for determining the value of a taxable article. The measure for assessing the levy need not correspond completely to the nature of levy, and no fault can be found with the measure so long as it bears nexus with the charge. ……
67. The amended provisions define a measure of charge and the standard adopted by the legislature for determining value which may require/press for broader base than that on which the charging proceeds. By now, it is well settled that stage of collection need not in point of time synchronise with the transfer of property in goods
for as is being a long standing position that in our country levy has status of constitutional concept while the point of collection is to be located where the statute declares it. Taking into account this, the valuation of tax being made at the stages is a convenient mode for point of collection. It would not be necessarily confused with the nature of tax. Rule 58 (1B) envisages a method of valuation of tax at the stages as have been referred to under the Table for collection of the same. In order to overcome various difficulties, to have the value of taxable articles for the purpose of MVAT, the legislature or its delegate has prescribed table giving stages for the purpose of computation of value of subject of tax. This appears to have been provided in order to have uniformity and to avoid vagaries, disparity or inconvenience from case to case. The same has been incorporated after deliberation and consultation with concerned departments and would not be liable to be termed as arbitrary.”
Conclusion
Ultimately, the Hon’ble High Court has rejected the writ petitions. Therefore, the builders and developers will be required to follow the rules 58(1A), (1B) & (1C) as they are. There are chances that due to their inability to bring required certificates, there will be higher taxation. Though such taxation is on consonance with the above judgment, there would be certainly injustice to the builders and developers, who were otherwise also in the doldrums and also further burdened by way of interest, etc. The legislature should devising a practical/convenient procedure for certifying /supporting the deductions claimed. Till then, the plight of builders would continue.
