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2013 (9) TMI 853 - SC - VAT and Sales TaxTaxing sale of goods Works Contract - Whether taxing sale of goods in an agreement for sale of flat which is to be constructed by the developer/promoter is permissible under the Constitution Held that - When the agreement between the promoter/developer and the flat purchaser is to construct a flat and eventually sell the flat with the fraction of land, it is obvious that such transaction involves the activity of construction inasmuch as it is only when the flat is constructed then it can be conveyed - There is no reason why such activity of construction is not covered by the term works contract . After all, the term works contract is nothing but a contract in which one of the parties is obliged to undertake or to execute works. Such activity of construction has all the characteristics or elements of works contract. The ultimate transaction between the parties may be sale of flat but it cannot be said that the characteristics of works contract are not involved in that transaction. When the transaction involves the activity of construction, the factors such as, flat purchaser has no control over the type and standard of the material to be used in the construction of building or he does not get any right to monitor or supervise the construction activity or he has no say in the designing or lay-out of the building, in our view, are not of much significance and in any case these factors do not detract the contract being works contract insofar as construction part is concerned. In a contract to build a flat there will necessarily be a sale of goods element. Works contracts also include building contracts and therefore without any fear of contradiction it can be stated that building contracts are species of the works contract. For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, three conditions must be fulfilled, there must be a works contract, the goods should have been involved in the execution of a works contract and the property in those goods must be transferred to a third party either as goods or in some other form. For the purposes of Article 366(29-A)(b), in a building contract or any contract to do construction, if the developer has received or is entitled to receive valuable consideration, these things need to fully met. It is so because in the performance of a contract for construction of building, goods like cement, concrete, steel, bricks etc. are intended to be incorporated in the structure and even though they lost their identity as goods but this factor does not prevent them from being goods. Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. The term works contract in Article 366 (29-A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services alone. Nothing in Article 366(29-A)(b) limits the term works contract . Transfer of property in goods under clause 29-A(b) of Article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made. The expression tax on the sale or purchase of goods in Entry 54 in List II of Seventh Schedule when read with the definition clause 29-A of Article 366 includes a tax on the transfer of property in goods whether as goods or in the form other than goods involved in the execution of works contract. Taxing the sale of goods element in a works contract under Article 366(29-A)(b) read with Entry 54 List II is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of immovable property. The value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat purchaser after incorporation of goods - Circular is a trade circular which is clarificatory in nature only. The notification enables the registered dealer to opt for a composition scheme Following decision of K. RAHEJA DEVELOPMENT CORPORATION versus STATE OF KARNATAKA 2005 (5) TMI 7 - Supreme Court and LARSEN & TOUBRO LIMITED & ANR. VERSUS STATE OF KARNATAKA & ANR. 2008 (8) TMI 28 - SUPREME COURT OF INDIA Decided against assesse.
Issues Involved:
1. Correctness of the two-Judge Bench decision in Raheja Development Corporation v. State of Karnataka. 2. Definition and scope of "works contract" under the Karnataka Sales Tax Act, 1957. 3. Taxability of development agreements and tripartite agreements as works contracts. 4. Constitutional validity of Section 2(24) of the Maharashtra Value Added Tax Act, 2002, and Rule 58(1A) of the Maharashtra Value Added Tax Rules, 2005. 5. Applicability of Article 366(29-A) of the Constitution to works contracts. 6. Distinction between works contracts and contracts for sale of goods. 7. Taxation of goods involved in the execution of works contracts. Detailed Analysis: Correctness of Raheja Development Corporation Decision: The Supreme Court was asked to consider whether the decision in Raheja Development Corporation v. State of Karnataka correctly interpreted the legal position regarding works contracts. The Court concluded that the decision in Raheja Development was correct, emphasizing that the definition of "works contract" includes agreements for construction activities for monetary consideration, irrespective of who carries out the construction activity. The Court upheld that developers who construct buildings for prospective purchasers under such agreements are executing works contracts. Definition and Scope of "Works Contract": The Court examined the definition of "works contract" under the Karnataka Sales Tax Act, 1957, which is inclusive and broad, encompassing various construction activities for monetary consideration. The Court reiterated that the definition does not distinguish based on the entity performing the construction, thus including developers who build for prospective purchasers. Taxability of Development Agreements: The Court analyzed the taxability of development agreements and tripartite agreements, concluding that these agreements, where developers undertake construction for prospective purchasers for monetary consideration, qualify as works contracts. The Court noted that the presence of clauses allowing developers to terminate agreements and retain lien on properties does not alter the nature of these contracts as works contracts. Constitutional Validity of MVAT Provisions: The Court upheld the constitutional validity of the amended explanation (b)(ii) to Section 2(24) of the Maharashtra Value Added Tax Act, 2002, and Rule 58(1A) of the Maharashtra Value Added Tax Rules, 2005. The Court found that these provisions align with the expanded definition of "sale" under Article 366(29-A) of the Constitution, which includes the transfer of property in goods involved in the execution of works contracts. Applicability of Article 366(29-A): The Court discussed the implications of Article 366(29-A), which allows the taxation of the transfer of property in goods involved in the execution of works contracts as deemed sales. The Court clarified that this constitutional provision enables the States to levy sales tax on the value of goods incorporated in the execution of works contracts, even if the goods become part of immovable property. Distinction Between Works Contracts and Sale of Goods: The Court reviewed various judicial precedents distinguishing works contracts from contracts for the sale of goods. It concluded that in composite contracts involving both elements, the distinction diminishes under Article 366(29-A). The Court emphasized that the dominant nature test is not applicable to such contracts, and States can levy sales tax on the materials used in the execution of works contracts. Taxation of Goods in Works Contracts: The Court affirmed that for a contract to be considered a works contract, it must involve (i) a works contract, (ii) goods involved in its execution, and (iii) the transfer of property in those goods. The Court upheld the principle that the value of goods at the time of their incorporation in the works should be the measure for the levy of tax, not the cost of acquisition. Conclusion: The Supreme Court approved the decision in Raheja Development Corporation, holding that it correctly interpreted the legal position regarding works contracts. The Court upheld the broad definition of works contracts under the Karnataka Sales Tax Act and validated the amendments to the Maharashtra Value Added Tax Act and Rules. The Court clarified that the expanded definition of "sale" under Article 366(29-A) allows States to levy sales tax on the value of goods incorporated in works contracts, even if they become part of immovable property. The Court emphasized that the dominant nature test does not apply to such contracts, and the value of goods at the time of incorporation should be the measure for the levy of tax.
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