2015 (7) TMI 230 - HC - VAT and Sales Tax

Denial of the benefit of composition under Section 4(7)(d) of the A.P. VAT Act - completed apartment - consideration & independent works contract - post-sale completion of works contract - semi-finished apartment - work contract executed prior to execution of sale deed - Held that - Section 4(7)(d) uses the words residential apartments, houses, buildings or commercial complexes. Rule 17(4) relates to treatment of Apartment Builders and Developers under composition. An apartment builder can only be a person who builds a completed apartment and not a semi-finished structure. The words residential apartment, house or commercial complex can only mean a completed building, and not a semi-finished structure. Only those dealers engaged in the construction of a residential apartment, house, building, commercial complex etc from its commencement till its completion, and in the sale of such buildings, are entitled for the benefit of composition under Section 4(7)(d) of the Act. The purchaser of the residential apartment, house/building etc, is the same person with whom the developer enters into the initial agreement, executes a registered deed for the sale of a semi-finished structure, and thereafter enters into a finishing agreement for completion of the semi-finished structure into a residential apartment, house, building etc. The artificial severance of the identity of the person who purchases the residential apartment/flat from a developer, firstly as a prospective buyer before execution of a sale deed, and thereafter as the owner of semi-finished structure, does not find support from a plain and literal construction of Section 4(7)(d). Where the literal reading of a fiscal statute produces an intelligible result, clearly there is no ground for reading in words or changing words according to what may be the supposed intention of the legislature. Registered deed executed for the sale of a semi-finished structure, and the finishing/completion agreement entered into thereafter to make the semi-finished structure a fully built residential apartment fit for occupation, are both integrally connected with the initial agreement entered into between the developer and the prospective buyer, and is not independent thereof. The scope of the work specified in the initial agreement is split into two. While the land component and a portion of the executed work are, ordinarily, reflected in the registered sale deed, the construction still remaining to be completed, in terms of the initial agreement, is specified in the finishing/completion agreement. The finishing agreement forms an integral part of the initial agreement. The total turnover, liable to tax under Section 4(7)(d), is the consideration reflected in the initial agreement which is later split up between the consideration reflected in the sale deed and the consideration receivable as specified in the finishing agreement. The liability of the dealer, to pay tax by way of composition under Section 4(7)(d) of the Act, is on the total consideration received, towards the composite value of the land and building, from the commencement of construction of the residential apartment, house, building etc., till its completion, and not merely on the consideration received for the construction of a semi-finished structure. - A construction which would make the provisions more effective and workable must be adopted, if possible without doing too much violence to the language used. An intention to produce an unreasonable result is not to be imputed to a statute. The pre-requisite, for being extended the benefit of composition under Section 4(7)(d), is for an application to be submitted in Form VAT 250 before commencement of construction. Section 4(7)(d) makes the benefit of composition thereunder subject to such conditions as may be prescribed. Section 2(24) of the Act defines prescribed to mean prescribed by Rules made under the Act. Rule 17(4)(b) of the Rules requires the dealer, exercising option under Section 4(7)(d), to notify the prescribed authority, on Form VAT 250, of his intention to avail composition for all works specified in Rule 17(4)(a). The requirement of notifying the authority in Form VAT 250 is stipulated in Rule 17(4)(b), to which the option under Section 4(7)(d) is subject to. Form VAT 250 requires, among others, the value of the contract to be mentioned therein. The value of the contract is the consideration reflected in the initial agreement between the developer and the prospective buyer. As Form VAT 250 forms part of Rule 17(4)(b), to which Section 4(7)(d) is explicitly made subject to, the submission urged on behalf of the revenue, that the Form cannot govern the provisions of the Act, does not merit acceptance. Consequently one of the benefits of composition, of not being required to maintain records, would no longer be available. Just like separate records being maintained as aforementioned, the consideration received/receivable for the construction and sale of the apartment would also have to be divided into three distinct parts for it is only the consideration received/receivable from a prospective buyer, for the construction made between the initial agreement and execution of a registered sale deed, which, according to the revenue, would alone fall within the ambit of Section 4(7)(d). The benefit which accrues to the State in prescribing a scheme for composition, i.e., reduction of the burden of tax administration, would also cease, as a result. Such a convoluted construction of Section 4(7)(d) does not merit acceptance. The requirement is for the dealer to be engaged both in construction and sale of the specified buildings. The mere fact that the word selling is used after the word construction does not mean that Section 4(7)(d) is applicable only to those dealers who are engaged in construction prior to the sale of the building, and not thereafter. The person who enters into the initial agreement with the developer for the purchase of the apartment/building proposed to be constructed (otherwise called the prospective buyer) is the same person in whose favour a registered sale deed is executed for conveyance of a semi-finished structure, and is also the very same person with whom the completion/finishing agreement is entered into by the developer thereafter. As the option for composition under Section 4(7)(d) can be exercised only by those dealers who construct and sell residential apartments, houses, commercial complexes, buildings, and not semi-finished structures, the option can neither be curtailed only till the stage of execution and registration of a sale deed, nor can the construction made subsequent thereto be excluded from its ambit. The entire construction, as specified in the initial agreement entered into between the developer and the prospective buyer, would fall within the ambit of Section 4(7)(d), and not merely that part of the construction undertaken prior to execution of a registered sale deed for a semi-finished structure. The residential apartments, houses, buildings and commercial complexes, referred to in Section 4(7)(d), can only mean fully constructed apartments, houses, buildings or commercial complexes, and not a semi-finished structure. As stipulated in Rule 17(4)(e), the liability to pay tax under Section 4(7)(d) is in the month in which the sale of such property is concluded or registered. The VAT dealer is required to declare the tax due in his monthly return, for the month in which the sale of the property is concluded and registered; and to pay the tax due either directly to the assessing authority or to the Sub-Registrar. The month, in which the sale of the property is concluded and registered, is the month in which the entire tax due is required to be paid which, as noted hereinabove, is at 4%/5% of 25% of the consideration received or receivable. As tax is required to be paid even on the consideration not yet received, it is evident that the liability to pay tax, on composition under Section 4(7)(d), is also on the consideration receivable on the construction to be continued and completed, in terms of the initial agreement, after conclusion and registration of the sale of the semi-finished structure. The VAT, at the rate prescribed in Section 4(7)(d), must be paid on the entire consideration, and not merely on the consideration reflected in the registered sale deed, to the Sub-Registrar at the time of registration or, in the very same month, along with the tax return, to the assessing authority. The entire tax liability is required to be discharged in the month in which the sale of a semi-finished structure is concluded and registered, and tax should be paid, at that stage itself, for the total consideration received or receivable for the land and buildings which would include the consideration which the developer has not yet received for the post-sale construction to be undertaken by him. The consideration still due, as referred to in the finishing/completion agreement, is the consideration stipulated in the initial agreement minus the consideration already received and reflected in the registered sale deed. It matters little, therefore, whether the right of the purchaser to sue for any defect in construction, post-execution of the sale deed, is referable to the completion agreement or to the initial agreement. If dealers engaged in the construction and sale of residential apartments, houses, buildings or commercial complexes exercise the option, and comply with the conditions stipulated in Section 4(7)(d) and Rule 17(4), they cannot be denied the benefit of composition thereunder for the construction made by them, for the very same person, after execution of a registered deed for the sale of a semi- finished structure. Denial of the benefits of the composition scheme under Section 4(7)(d) to such dealers, for the post-sale construction made in terms of the initial agreement, is illegal and is contrary to the provisions of the AP VAT Act and the Rules made thereunder. The impugned assessment orders must therefore be, and are accordingly, set aside. - matter remanded back - Decided in favour of assessee.

Summary

Issues Involved:
1. Conflicting Advance Rulings
2. Submissions Beyond the Impugned Orders
3. Eligibility for Composition under Section 4(7)(d) Post-Sale
4. Distinction Between Pre-Sale and Post-Sale Works Contracts
5. Consideration for Finishing Works
6. Legislative Intent and Historical Context

Detailed Analysis:

I. Conflicting Advance Rulings:
The petitioners contended that the rulings in Maytas Hill Country Pvt. Ltd. and Sai Sree Developers (P) Ltd. were applicable and binding as per Section 67(4) of the Act. The assessing authorities failed to follow these rulings, instead relying on conflicting rulings in M/s Madhu Collections and M/s Lumbini Constructions (P) Ltd. The court noted that conflicting rulings create confusion and emphasized the need for uniformity in tax administration. The court aimed to resolve the uncertainty by interpreting Section 4(7)(d) of the Act.

II. Submissions Beyond the Impugned Orders:
Petitioners argued that the revenue's submissions exceeded the scope of the assessment orders and counter affidavits. The court found it unnecessary to address this contention as the interpretation of Section 4(7)(d) is a pure question of law that can be raised at any stage, even for the first time in writ proceedings.

III. Eligibility for Composition under Section 4(7)(d) Post-Sale:
Petitioners argued that Section 4(7)(d) does not exclude the composition facility for post-sale construction. They claimed that both the sale deed and the construction agreement are integral parts of the initial agreement, and the entire tax liability was discharged upon registration of the semi-finished flat. The court examined the statutory provisions and held that the liability to pay tax under Section 4(7)(d) includes the total consideration received or receivable for the composite value of land and building, from commencement to completion of construction.

IV. Distinction Between Pre-Sale and Post-Sale Works Contracts:
The court rejected the revenue's contention that post-sale construction constitutes a separate works contract. It emphasized that the entire construction, as specified in the initial agreement, falls within the ambit of Section 4(7)(d). The court noted that the artificial severance of the identity of the purchaser before and after the sale deed does not align with the plain language of Section 4(7)(d).

V. Consideration for Finishing Works:
The court held that the consideration for the finishing works is part of the initial agreement. The tax liability under Section 4(7)(d) is on the total consideration stipulated in the initial agreement, which includes the value of land and the completely constructed building. The court clarified that any construction beyond the scope of the initial agreement would be an independent works contract, taxable under Section 4(7)(a).

VI. Legislative Intent and Historical Context:
The court referred to the APGST Act and the distinction made between general works contracts and those for constructing apartments and buildings. It noted that this distinction continued under the AP VAT Act, reflecting the legislative intent to extend the benefit of a distinct composition scheme to contractors of residential apartments and buildings. The court emphasized that the benefit of composition under Section 4(7)(d) is not contingent on the stage of construction when a registered sale deed is executed.

Conclusion:
The court concluded that dealers engaged in the construction and sale of residential apartments, houses, buildings, or commercial complexes who exercise the option under Section 4(7)(d) and comply with the conditions cannot be denied the benefit of composition for post-sale construction. The impugned assessment orders were set aside, and the assessing authorities were directed to re-examine the matter in light of the court's findings and pass fresh orders in accordance with the law. The writ petitions were disposed of accordingly, without costs.