2013 (10) TMI 1218 - HC - VAT and Sales Tax

Works Contract - Whether activity of construction / development by a Builder would constitute Work Contract in certain circumstances - Held that - Construction of flats on its own can not be tanable as work contract under U.P.T.T. where the right title and interest in the construction continue to remain with the developer mere payment term would not alter the nature of transaction - particular unit is not resold but retained by the Appellants, there would be no works contract to that extent. But so long as there is no termination the construction is for and on behalf of purchaser. Therefore, it remains a works contract within the meaning of the term as defined under the said Act. It must be clarified that if the agreement is entered into after the flat or unit is already constructed, then there would be no works contract. But so long as the agreement is entered into before the construction is complete it would be a works contract - Following decision of ASSOTECH REALTY PVT. LTD. Versus STATE OF U.P. 2007 (3) TMI 32 - HIGH COURT , ALLAHABAD - Decided against assessee.

Summary

Issues:
Challenge to provisional assessment order under the U.P. Value Added Tax Act, 2008 for levying commercial tax on the sale of goods in construction contracts.

Analysis:
The writ petition challenges a provisional assessment order for levying commercial tax on the sale of goods in construction contracts. The petitioner argues that no sale of goods is involved in building contracts, contending that the constructed flats/houses/apartments are transferred as chattels. The petition refers to previous cases where conflicting opinions were expressed regarding the imposition of sales tax on such contracts. The Supreme Court's larger bench clarified the legal position, emphasizing that a works contract involving the transfer of goods to a third party constitutes a sale. The judgment elaborates on the definition of a works contract, the transfer of property in goods, and the inclusion of building contracts under works contracts.

The Legal Position:
The Supreme Court emphasized that a works contract involves the transfer of goods, even if the goods lose their identity upon incorporation into a structure. The judgment clarifies that a contract may combine elements of both a contract for sale of goods and a contract for work or service, blurring the distinction between the two. The legal fiction introduced by Article 366(29-A)(b) deems the transfer of property in goods in a works contract as a sale. The judgment also discusses the taxation of goods in a works contract, emphasizing that the value of goods at the time of incorporation should be the basis for tax calculation.

Interpretation of Works Contracts:
The judgment interprets works contracts broadly, encompassing various construction activities for valuable consideration. It clarifies that construction undertaken for prospective purchasers constitutes a works contract, even if the developer retains certain rights or terminates the agreement. The court's analysis highlights that the nature of the construction activity determines whether it falls under the purview of a works contract.

Precedent and Disposition:
The judgment refers to a previous case where the court set aside assessment orders imposing tax on constructions, emphasizing that constructions not undertaken for prospective allottees do not qualify as works contracts. The Supreme Court's decision in another case emphasized the need for thorough adjudication and statutory appeals in tax assessment matters. Consequently, the petitioners are advised to pursue remedies under the relevant tax laws instead of pursuing writ petitions. The writ petition is dismissed with liberty to seek remedies through appropriate legal channels.