Introduction
A very interesting issue was under litigation in relation to scope of ‘Works Contract’. The background of the works contract taxation is the landmark judgment of Hon’ble Supreme Court in case of Gannon Dunkerly & Co. (9 STC 353)(SC). While examining the scope of ‘sale’ for levy of sales tax, the Hon’ble Supreme Court held that the word ‘sale’ has to be interpreted in a limited sense. In fact, the Hon’ble Supreme Court held that ‘sale’ will have following meaning.
“Thus, according to the law both of England and of India, in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods ……”
From the above passage, it is clear that to be a ‘sale’, the following criteria should be fulfilled:
(i) There should be two parties to contract i.e. seller and purchaser,
(ii) The subject matter of sale is moveable goods,
(iii) There must be money consideration and
(iv) Transfer of property i.e., transfer of ownership from seller to purchaser.
Therefore, if the transaction was composite i.e. it also had labour as well as service element in it, it was held that it was not covered within the sales tax laws.
46th Amendment to the Constitution of India
To bring the ‘works contract’ transactions within the purview of sales tax levy, the Constitution of India was amended vide 46th amendment to the Constitution, in the year 1983. Along with other transactions, the ‘works contract’ transactions were also ‘deemed to be a sale’ for the purpose of levy of sales tax. The said purpose was achieved by inserting clause (29A) in Article 366 of the Constitution of India.
The relevant part is reproduced herein below for ready reference:
(29A) “tax on the sale or purchase of goods” includes–
(a) ……
(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
(c) to (f) …… and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;”
Scope of the Supreme Court judgment
Wherever composite transactions were involving goods and services, they were deemed to be covered within the scope of above constitutional amendment and were considered to be taxable under sales tax laws. In other words, there was no controversy about such coverage.
However, the issue arose in relation to sale of under construction premises like sale of premises by builders and developers. Normally, the builders and developers come up with their own projects and enter into agreement with prospective buyers for sale of premises like flats and offices etc. The intention of the builder and prospective buyer is to give/get possession of immovable property like a ready flat. It was believed that such contracts are not works contracts.
The first controversy arose before Supreme Court in case of K. Raheja Construction (141 STC 298)(SC). In this case there was tri-party agreement where landlord as owner of land, K. Raheja as developer and prospective buyer were parties. The agreement was entered into when the construction was in progress.
The value of the land and construction was shown separately. The argument of the dealer i.e. K. Raheja was that the agreement is for sale of immovable property as premises and not for carrying out any ‘works contract’. However, the Supreme Court rejected the argument holding that the agreement is ‘works contract’.
Maharashtra Chamber of Housing Industry judgment
After above judgment in K. Raheja, MVAT Act, 2002, was amended on 20-06-2006, whereby definition of ‘works contract’ was provided in the Act. In view of this provision, the Commissioner of Sales Tax, Maharashtra State issued a circular fastening liability on builders. The amendment and the circular were challenged before the Hon’ble Bombay High Court based on sample agreement under Maharashtra Ownership Flat Act (MOFA). The main plea before the Hon’ble High Court was that the State cannot consider the agreement involving third element i.e. land, as works contract.
The Hon’ble Bombay High Court delivered a judgment as reported in (51 VST 168), wherein rejecting arguments of the builders and developers, the agreements under MOFA were considered to be works contract transactions and the levy of tax on such transactions was held to be constitutionally valid.
Judgment of Larger Bench of Supreme Court in Larsen & Toubro Limited and another vs. State of Karnataka and another & Others.
The K. Raheja judgment came to be analysed by the Hon’ble Supreme Court in case of Larsen & Toubro Limited and another vs. State of Karnataka and another (17 VST 460)(SC), Hon’ble Division Bench did not concur with the judgment in K. Raheja and referred the matter to Larger Bench. The Hon’ble Larger Bench has resolved the above controversy vide recent judgment in Larsen & Toubro Limited vs. State of Karnataka, Civil Appeal No. 8672 of 2013 dated 26.9.2013. Alongwith the above, Larger Bench also considered judgment of MCHI (51 VST 168), as it was also before Supreme Court out of an SLP filed by MCHI.
Out come of Larger Bench Judgment
The Hon’ble Supreme Court has analysed the arguments of both the sides. The main argument of the developers was that the contract involving two elements only i.e. goods and services, can be considered as ‘works contract’ under above article 366 (29A)(b). However, the Hon’ble Supreme Court has held that there is no such limitation and a contract involving a third element like land can also be considered as a works contract.
A further argument that was advanced was that there is transfer of immovable property and not transfer of movable goods. In this respect also, the Hon’ble Supreme Court rejected the argument observing that even if the goods used get transformed into immovable property and such immovable property get transferred to the buyer, still it will be taxable ‘works contract’ for sales tax purposes. However, the Hon’ble Supreme Court observed that while taxing value of goods in the contract, no portion relating to immovable property should get taxed.
The Hon’ble Supreme Court has also observed that the contract will commence from the stage when the agreement is entered into with the prospective buyer. In other words, the work completed prior to such agreement will not be taxable.
It is also held that if the sale is of completed premises then it will not be covered by the sales tax laws.
In relation to MVAT Act, 2002, the Hon’ble Supreme Court has observed that rule 58(1A) of the MVAT Rules, 2005 should be relooked at by the government and the effect should be clarified by the government. It is also observed that double taxation should be avoided.
Conclusion
The above judgment will have far reaching effect. It has expanded the scope of ‘works contract’ transactions which can be subjected to sales tax. The Bombay High Court judgment in case of MCHI was relating to agreement under MOFA, whereas the observations of the Supreme Court suggest that other contracts though not falling within the ambit of MOFA can also be covered under the works contract category.
In relation to MVAT Act, 2002 the Hon’ble Supreme Court has directed clarification of rule 58(1A), and has also directed to ensure that there is no double taxation. Under the above circumstances, the builders and developers in Maharashtra should wait till such clarification is given by the government, as for proper discharge of liability such clarification is absolutely essential.
