2023 (4) TMI 1248 - HC - VAT and Sales Tax

Works contract - neither tripartite agreement nor any prior sale deed nor had the assessee otherwise executed any works contract on behalf of the eventual purchasers with respect to construction raised by the assessee on its own land - addition of 10% in purchase of value of goods for calculating the deemed sale, ignoring the value of goods at the time of incorporation of goods consumed in the construction even though the property in goods passes later on - constructions raised by the assessee were by way of execution of works contract - applicability of decisions of the Supreme Court in the case of K. Raheja 2005 (5) TMI 7 - SUPREME COURT and Larsen Toubro 2013 (9) TMI 853 - SUPREME COURT . Whether the linkage between such 'agreement' and the construction raised by the assessee exists as may further qualify the 'agreement' to be a 'works contract', within the meaning of that term of Section 2(au) of the Act? - HELD THAT - The assessee was raising the constructions of residential accommodation. Though it may have started that construction activity on its own account, at the same time, it invited offers from the public at large and accepted such offers from particular individuals, against conditions agreed in writing - on a mutual set of promises extended by the allottees and the assessee, the terms of the Allotment Letter and the agreement giving rise to a works contract arose. Thus, amongst others, it included a payment plan, adherence to which a sine qua non to the continued allotment in favour of that individual allottee. The fact that the assessee had a right to cancel the allotment and the further fact that the title in the constructions being raised and the interest in land would be transferred on a future date (upon execution of proper lease deed and sale deed), would not deflect the existence of works contract that had arisen, as a direct consequence of the Allotment Letter. In L T case 2013 (9) TMI 853 - SUPREME COURT , the matter came to be referred to the three judge bench of the Supreme Court. Again, in that case, the L T was a developer seeking to raise constructions described as development over the land owned by an individual. There was an arrangement between the L T and the owner of the land that after the development, 25% of the total space would belong to the owner whereas 75% would belong to the L T yet, applications were invited from public for allotment of the proposed constructions. Upon Allotment Letters issued and also under an agreement to sell executed with intended purchasers, the constructed apartments were to be handed over to the individual purchasers with undivided interest in the land also. Sale deeds were thus executed in favour of the allottees by the L T and the owner of the land. It is in such circumstance and that L T was subjected to works contract tax. While dealing with the doubt expressed as to the correctness of the K. Raheja case 2005 (5) TMI 7 - SUPREME COURT , the larger bench of the Supreme Court clearly opined that the fact that the transfer of the flat and conveyance of land would arise on a future date, upon all installments being paid and that agreement between the developer and flat purchaser was one for sale of flats, had no merit. The reason to reject the challenge was given by the Supreme Court by observing that the doubt thus expressed clearly overlooked the typical nature of developer agreement. The developer does so for monetary consideration. The liability of payment was also found not decisive, though the factum of payment was found to be so. Here, as well, it is an undeniable truth in the facts found by the Tribunal that the constructions were made by the assessee, though on its own land against Allotment Letter issued to and payments made by 403 allottees. It would be appropriate to note here itself that the revenue authorities have taxed the assessee only to the extent of payments were received by it against 403 flats. Only with respect to those allotments/payments received, works contract was found existing and only with respect to those flats, transfer of property involved in the execution of works contract has been assessed. That has been quantified at 59% of the total flats. Addition of profit to the book value of the goods involved in the execution of the works contract - HELD THAT - Though the books of accounts of the assessee have not been rejected, in absence of proof of facts requiring applicability of Rule 9, estimation of deemed profit became necessary to be made - to determine the turnover of works contract . In that, the Tribunal cannot be faulted for applying the 10% rule as a rough and ready method to estimate, considering compoundable cases, the turnover (to be subjected to tax). Insofar as the Tribunal seems to have applied the time tested measure to make estimate, there are no good ground to offer any interference with the finding of the Tribunal, in exercise of revision jurisdiction of the Court. Rule 9 enables the assessee to seek all appropriate allowable deductions. Thus, on this issue as well, the matter does not call for any interference. The questions are answered in favour of revenue and against the assessee - revision dismissed.

Summary

Issues Involved:
1. Whether the constructions raised by the assessee were by way of execution of 'works contract'.
2. Whether the Tribunal was right in sustaining the addition of 10% in the purchase value of goods for calculating the deemed sale.

Comprehensive Summary:

Issue 1: Execution of 'Works Contract'
The High Court examined whether the constructions raised by the assessee were by way of execution of 'works contract' under Section 58 of the Uttar Pradesh Value Added Tax Act 2008. The Tribunal had affirmed that 59% of the total constructions (403 out of 681 flats) were executed as 'works contract'. The assessee argued that the constructions were initiated on its own land and funds without any prior agreement, thus not qualifying as 'works contract'. However, the Court noted that the Allotment Letters issued to prospective buyers created enforceable rights and constituted an 'agreement' under the Contract Act. The Court referred to the Supreme Court's decisions in K. Raheja Development Corporation Vs. State of Karnataka and Larsen and Toubro Limited & Anr. vs State of Karnataka & Anr., which clarified that even if the developer is the owner of the land, the construction activity for a third party under an agreement qualifies as a 'works contract'. The Court concluded that the assessee's activities fell within the definition of 'works contract' as per Section 2(au) of the Act.

Issue 2: Addition of 10% in Purchase Value of Goods
The Tribunal had sustained an addition of 10% to the purchase value of goods for calculating the deemed sale, which the assessee contested. The assessee argued that the value of goods should be considered at the time of incorporation into the construction. The Court found that the Tribunal's approach of adding 10% profit to the book value of goods was a reasonable estimation method, especially in the absence of detailed records maintained by the assessee as per Rule 9 of the Rules. The Court held that the Tribunal's decision to use a rough and ready method to estimate turnover was justified and did not warrant interference.

Conclusion:
The High Court dismissed the revision, affirming the Tribunal's findings that the constructions were executed as 'works contract' and upholding the 10% addition to the purchase value of goods for calculating the deemed sale. The questions of law were answered in favor of the revenue and against the assessee.