2014 (7) TMI 444 - HC - VAT and Sales Tax

Demand of higher rate of tax - Constitutional validity of the newly introduced provisos to section 8(a)(iiii) of the Kerala Value Added Tax Act, 2003 by the Finance Act, 2007, taking away the benefit of the lesser rate of compounding, being availed of by the petitioners with retrospective effect from April 1, 2005 - Held that - There is no challenge with regard to the source of power to bring about the enactments, with reference to the relevant entry in the State List under the Seventh Schedule of the Constitution of India. Similarly, why the provisos become inequitable is also not substantiated. If there was a works contract, as on March 31, 2005 and the assessee opted to pay compounded rate of tax under section 7(7) or 7(7A) of the KGST Act, such assessee is entitled to continue to pay at the same rate of tax in respect of the unexecuted portion of said works contract. It is corollary to note that, if the works contract is on or after April 1, 2005, it was not a works contract prior to the date of coming into force of the KVAT Act and in such case, the benefit of lesser tax under section 8(a)(iii) is not available. There was no works contract prior to coming into force of the said Act, in respect of any agreement executed on or after April 1, 2005. This being the position, it cannot be said that the petitioners had commenced the construction of the buildings prior to April 1, 2005, pursuant to any agreement executed on or after April 1, 2005, for claiming lesser compounded rate of tax as given in section 8(a)(iii), (dehors the newly added provisos as per the Finance Act, 2007). By virtue of the very nature of contract being undertaken by the petitioners, whereby independent residential flats are intended to be constructed on behalf of the different prospective purchasers (awarders) based on different agreements to be executed in between, accepting consideration from such different persons, it gives rise to several independent works contracts and is taken care of by section 8(a)(iii) itself. This being the position, the petitioners cannot be heard to say that they became aggrieved only by introduction of the newly added provisos as per the Finance Act, 2007. With reference to the substitution of the newly added proviso as per the Kerala Finance Act, 2009, it is contended that, this will take care of the whole situation, as the benefit is intended to be given in respect of the works which commenced prior to April 1, 2008 and remains partly unexecuted as on April 1, 2008, to be mulcted with tax liability as it existed prior to April 1, 2008 till the completion of the work or up to March 31, 2009. - Since it is a substantive provision and not a procedural one, it cannot have any retrospective application and the intention of the law makers cannot be widened by any reading into exercise, at the instance of this court to suit the convenience of the petitioners. This court finds that the reliance sought to be placed on the said provisions is quite out of context. Challenge raised against the constitutional validity of the provisos impugned in the writ petitions is devoid of any merit. There is no irregularity or illegality on the part of the respondents for having issued the impugned notices demanding higher rate of tax in respect of the works contracts entered into between the petitioners (contractors) and the prospective purchasers (awarders) based on any agreement executed on or after April 1, 2005. - Decided against assessee.

Issues Involved:
1. Constitutional validity of the newly introduced provisos to section 8(a)(iii) of the Kerala Value Added Tax Act, 2003.
2. Retrospective effect of the new provisos and its impact on the petitioners.
3. Discrimination between contractors due to the new provisos.
4. Interpretation and applicability of the new provisos to ongoing works contracts.

Issue-Wise Detailed Analysis:

1. Constitutional Validity of the Newly Introduced Provisos:
The petitioners challenged the constitutional validity of the newly introduced provisos to section 8(a)(iii) of the KVAT Act by the Finance Act, 2007. They argued that these provisos are beyond legislative competence, inequitable, and discriminatory. However, the court found that the petitioners did not substantiate how the provisos were beyond legislative competence. The court observed that the benefit under section 8(a)(iii) was a concession, and there was no challenge to the source of power for the enactments. Thus, the court concluded that the challenge against the constitutional validity of the provisos was unsupported and answered against the petitioners.

2. Retrospective Effect of the New Provisos:
The petitioners contended that the new provisos took away the benefit of a lesser compounded rate of tax with retrospective effect from April 1, 2005, which was arbitrary and unjust. They argued that they had been collecting and remitting tax at a compounded rate of 2.3% based on section 8(a) of the KVAT Act, and the abrupt change imposed an additional burden. The court, however, found that the liability to pay higher tax for agreements executed between April 1, 2005, and March 31, 2007, was not a direct result of the amendment but was discernible from section 8(a)(iii) as it existed before the amendment. The court concluded that the retrospective application of the new provisos was justified.

3. Discrimination Between Contractors:
The petitioners argued that the new provisos created discrimination between contractors who undertook works before and after March 31, 2005. The court examined the grounds of discrimination and found that the benefit of lesser tax under section 8(a)(iii) was only available to works contracts that were live and incomplete as of April 1, 2005. The court noted that the petitioners had executed several agreements after April 1, 2005, and thus, the benefit of lesser tax was not applicable to them. The court concluded that there was no unjust discrimination as the provisos were intended to limit the benefit to specific circumstances.

4. Interpretation and Applicability of the New Provisos:
The court analyzed the scope of the newly added provisos and found that they were intended to clarify the position regarding subsequent parts or phases of original works for which an option had been filed under the KGST Act. The court noted that the petitioners had executed several independent works contracts with different clients after April 1, 2005, and thus, the benefit of lesser tax under section 8(a)(iii) was not applicable. The court also examined the substituted provisos introduced by the Kerala Finance Act, 2009, and concluded that they did not apply retrospectively and were not relevant to the petitioners' case. The court upheld the respondents' actions in issuing notices demanding higher tax rates for agreements executed after April 1, 2005.

Conclusion:
The court dismissed both writ petitions, holding that the challenge against the constitutional validity of the provisos was without merit, and there was no irregularity or illegality in the respondents' actions demanding higher tax rates for works contracts entered into after April 1, 2005.

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