Introduction
The historical background of works contract is very interesting. In a landmark judgment in the case of Gannon Dunkerley & Co. (9 STC 353) the Supreme Court held that it is the transaction of ‘sale’ within the meaning of the Sale of Goods Act, which can be covered by Sales tax legislations. It was held that the transactions of sale, which are completed by delivery, are sale transactions as per the Sale of Goods Act and such transactions can only be taxable under sales tax laws. Where there is a composite contract, like supply of materials and application of labour, it becomes a works contract transaction and cannot be covered by Sales tax legislations. After the above judgment, for number of years, the transactions of works contracts remained outside the scope of Sales tax legislations. It is in the year 1983, the Constitution was amended (46th Amendment), whereby, for enabling levy of Sales tax, deemed sale category was inserted. This was done by insertion of clause (29A) in Article 366 of the Constitution of India. One of such deemed sales category is ‘works contract’ transaction.
After getting powers to levy Sales tax on works contract transactions, States including Maharashtra made legislations for levy of Sales tax on works contract transactions. In Maharashtra, there was a separate Maharashtra Works Contract Act, 1989. Under the above Act, an issue arose, as to whether tax can be attracted on builders & developers, who come up with their own projects and while the construction is in progress, enters into agreement for sale of premises. In the DDQs issued at that time, it was held that such agreements cannot be liable under the Works Contract Act. Reference can be made to the DDQ in case of Unity Developer & Paranjape Builders (DDQ 1188/C/40/ Adm-12, dated 10-3-1988). It was held that there is no employer-contractor relationship between buyer of premises and builder. G. G. Goyal Chartered Accountant C. B. Thakar Advocate VAT Similar position is also repeated in DDQ in the case of M/s. Rehab Housing Pvt. Ltd. & Larsen & Toubro Ltd. (JV) (WC-2003/ DDQ-11/Adm-12/B-276, dated 28-6-2004). In this DDQ, the issue was about constructing tenements for contractee, where price was composite for land and construction. It was held that this is a contract for immoveable property and not covered by the Works Contract Act.
Change in situation
From 1-4-2005, the Works Contract Act is merged into the MVAT Act, 2002 and works contract transactions are covered by the said MVAT Act, 2002. However, still the above situation prevailed and there was no attempt to levy tax on builders & developers. However, in 2005, the Supreme Court delivered judgment in case of K. Raheja Construction (141 STC 298) (SC). In this case, noting that there is separate value for land and separate value for construction, the Supreme Court held the developer as liable to works contract. After the judgment in the case of K. Raheja Construction (141 STC 298) (SC), the VAT authorities held a view that ‘Under Construction Contracts’ are liable to VAT as works contract. The definition of works contract was introduced in the MVAT Act, 2002 on 20-6-2006. Thereafter, the Commissioner of Sales Tax issued Circular 12T of 2007, dated 7-2-2007 explaining that builders & developers, coming up with their own project but entering into agreements for sale of premises, when the construction is under progress, will be works contract transactions and accordingly liability as works contract will be required to be discharged under the MVAT Act, 2002. It was further explained that if the agreement is after completion of construction, then such agreements will not be covered.
In other words, ‘under construction contracts/ agreements’ were stated to be taxable under the MVAT Act, 2002.
Matter before Bombay High Court After the above development, writ petitions were filed before the Bombay High Court challenging the above interpretation and proposed levy. The High Court has recently decided the said controversy by way of judgment in the case of the Maharashtra Chamber of Housing Industry & Ors. (51 VST 168). The short facts and gist of arguments before the High Court can be noted as under: On behalf of petitioners (a) The amendment in definition of ‘sale’ is unconstitutional, if it is contemplating to levy tax on immovable property. (b) It was shown that the provisions refer to conveyance of land or interest in land, which means immovable property. It was also argued that in works contract the property should pass while executing the contract and not after completion. In case of premises, property passes after construction and conveyance and hence it is a sale of immovable property and not execution of works contract. (c) The works contract contemplates two elements i.e., labour and materials. If third element like land is involved, there is no works contract under Sales tax laws. (d) It was argued that there is no transfer of property to individual buyer of premises, but it is transferred to society by conveyance. Under the above circumstances, no works contract for individual buyers. Provisions of the Maharashtra Ownership Flats (Regulations of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 (MOFA) and Model Agreement thereunder, were also referred to. (e) Unlike in the case of K. Raheja (cited supra), in case of agreement under MOFA, there is no separate price for land/construction and hence transaction cannot amount to works contract. (f) Under the MVAT Rules, 2005, there is Rule 58(1A) to grant deduction towards cost of land.
However, deduction is restricted to 70% of contract value. It was argued to be unconstitutional, as, if land value is exceeding 70%, it will amount to levy of tax on land value, which is not permissible.
On behalf of Government
(a) There is no restriction that if land is involved, the State cannot isolate sale of goods from such contract.
(b) There can be various species of contract and ‘under construction agreement for premises’ is one such specie.
(c) The main argument of the Government was that as per the MOFA Act and Model agreement, buyer gets protection from various aspects like builder cannot change plan, no mortgage of land, etc. Therefore, citing stamp duty judgments, it was argued that construction, after entering into agreement, till completion, will amount to works contract.
(d) Rule 58(1A) is only for measurement of tax and hence not unconstitutional.
Judgment of High Court
The High Court, after considering the above arguments, held that under construction contract is works contract and VAT can be attracted on the same. The main thrust of judgment is that by making agreement under MOFA, buyer gets some interest in the said flat/premises. The Construction thereafter is therefore works contract. The reasoning of the High Court can be noted as under:
“29. In enacting the provisions of the MOFA, the State Legislature was constrained to in-tervene, in order to protect purchasers from the abuses and malpractices which had arisen in the course of the promotion of and in the construction, sale, management and transfer of flats on ownership basis. The State Legislature has imposed norms of disclosure upon promoters. The Act imposes statutory obligations. The manner in which payments are to be made is structured by the Legislature. As a result of the statutory provisions, an agreement which is governed by the MOFA is not an agreement simplicitor involving an ordinary contract under which a flat purchaser has agreed to take a flat from a developer, but is a contract which is impressed with statutory rights and obligations. The Act imposes restrictions upon a developer in carrying out alterations or additions once plans are disclosed, without the consent of the flat purchaser. Once an agreement for sale is executed, the promoter is restrained from creating a mortgage or charge upon the flat or in the land, without the consent of the purchaser. The Act contains a specific stipulation that if a mortgage or charge is created without consent of purchasers, it shall not affect the right and interest of such persons. There is hence a statutory recognition of the right and interest created in favour of the purchaser upon the execution of a MOFA agreement.
Having regard to this statutory scheme, it is not possible to accept the submission that a contract involving an agreement to sell a flat within the purview of the MOFA is an agreement for sale of immovable property simplicitor. The agreement is impressed with obligations which are cast upon the promoter by the Legislature and with the rights which the law confers upon flat purchasers.”
Holding the above view, the High Court held that ‘Under Construction Contract/Agreements’ will be covered under the MVAT Act, 2002.
Conclusion
Therefore, as on today the State can levy tax on under construction agreements. However, matter is subject to the Supreme Court. It can be noted here that similar controversy in relation to the Karnataka State is already before the larger Bench of the Supreme Court in the case of Larsen & Toubro Limited and Another v. State of Karnataka and Another, (17 VST 460) (SC). Therefore, the ultimate fate will depend upon the Supreme Court judgment.
