2015 (4) TMI 784 - HC - VAT and Sales Tax

Inclusion of value of land for charging Value Added Tax - development and sale of apartments/flats/units - Constitutional validity of Explanation (i) to Section 2(1)(zg) of the Haryana Value Added Tax Act, 2003 and Rule 25 (2) of the Haryana Value Added Tax Rules, 2003 - Violation of Article 246 of the Constitution of India read with Schedule VII, List II, Entry 54 - Claim of refund the tax already paid in so far as it related to the value of materials sought to be charged to VAT. Held that - Once it is concluded that the developer/builder/promoter are covered under the works contract while entering into an agreement between them and the flat purchaser to construct a flat and ultimately to sell the flat with the fraction of land, we proceed to examine the broad principles for determining the taxable turnover relating to transfer of goods involved in the execution of such works contract Explanation (i) to Section 2(1)(zg) of the Act which defines sales price provides for deduction on account of labour, material and services related charges from the gross turnover as defined under Section 2(1)(u) of the Act while arriving at the sale price in a works contract. It is not a charging provision which creates any liability for assessing VAT in a works contract . It is in the definition clause of the Act and the provision does not embrace within its ambit something which is otherwise prohibited by law. Thus, the said provision does not suffer from any vice or defect of unconstitutionality. Rule 25(2) of the Rules provides for deduction of charges towards labour, services and other like charges and where they are not ascertainable from the books of accounts maintained by a developer etc., the percentage rates are prescribed in the table provided in the said rule. It is necessarily required to provide mechanism to tax only the value addition made to the goods transferred after the agreement is entered into with the flat purchaser. The deductive method thereunder does not provide for any deduction which relate to the value of the immovable property. The legislature has not made any express provision for exclusion of value of immovable property from the works contract and its method of valuation has been left to the discretion of the rule making authority to prescribe. Apex Court in M/s. Larsen & Toubro Limited & Another Versus State of Karnataka & Another 2013 (9) TMI 853 - SUPREME COURT while considering the legality of Rule 58 of the Maharasthra Value Added Tax Rules, 2005 (MVAT) has held that, the value of the goods which can constitute the measure of the levy of the tax has to be the value of the goods at the time of incorporation of goods in the works even though property in goods passes later. Taxing the sale of goods element in a works contract is permissible even after incorporation of goods provided tax is directed to the value of goods at the time of incorporation and does not purport to tax the transfer of immovable property. In case the provisions of law are seeking to charge sales tax on any amount other than the value of goods transferred in course of execution of works contract, the provisions would be ultra vires the Constitution of India. The tax is to be computed on a value not exceeding the value of transfer of property in goods on and after the date of entering into agreement for sale with the buyers. However, the deductive method requires all the deductions to be made therefrom to be specifically provided for to ensure that tax is charged only on the value of transfer of property in goods on and after the date of entering into agreement for sale with the buyers. Where deductive method has been prescribed under the rules for ascertaining the taxable turnover, ordinarily it should include a residuary clause in consonance with the mandate of law so as to cover all situations which can be envisaged. Essentially, the value of immovable property and any other thing done prior to the date of entering of the agreement of sale is to be excluded from the agreement value. The value of goods in a works contract in the case of a developer etc. on the basis of which VAT is levied would be the value of the goods at the time of incorporation in the works even where property in goods passes later. Further, VAT is to be directed on the value of the goods at the time of incorporation and it should not purport to tax the transfer of immovable property. Consequently, Rule 25(2) of the Rules is held to be valid by reading it down to the extent indicated hereinbefore and subject to the State Government remaining bound by its affidavit dated 24.4.2014 The State Government shall bring necessary changes in the Rules in consonance with the above observations. Under sub-section (1) of Section 42 of the Act, where the works contractor gets the construction work executed through a subcontractor, whether in whole or in part, it shall be the joint and several liability of the contractor and the sub-contractor. Sub-section (2) of Section 42 thereof clarifies that a contractor shall not be under any liability to pay tax in respect of a works contract , if the same has been paid by a sub-contractor and that his assessment has become final. This provision only safeguards the interest of the revenue in the event of failure on the part of the sub contractor to discharge his liability of tax in respect of transaction entered by the sub contractor with the contractor. The provision, thus, cannot be said to be arbitrary, discriminatory or unreasonable in any manner. The provision wherein the tax was to be assessed in the hands of the developers even where the property was transferred by the sub-contractor was clearly untenable in law and was liable to be quashed. Under sub-section (1) of Section 42 of the Act, where the works contractor gets the construction work executed through a subcontractor, whether in whole or in part, it shall be the joint and several liability of the contractor and the sub-contractor. Sub-section (2) of Section 42 thereof clarifies that a contractor shall not be under any liability to pay tax in respect of a works contract , if the same has been paid by a sub-contractor and that his assessment has become final. This provision only safeguards the interest of the revenue in the event of failure on the part of the sub contractor to discharge his liability of tax in respect of transaction entered by the sub contractor with the contractor. The provision, thus, cannot be said to be arbitrary, discriminatory or unreasonable in any manner. Once a dealer opts for composition scheme which is optional, he gets various advantages and privileges which otherwise are not available to ordinary VAT dealers. In such a situation, in view of the judgment of the Apex Court in Koothattukulam Liguous v. Deputy Commissioner of Sales Tax 2014 (3) TMI 782 - SUPREME COURT , the method of determining tax liability under these provisions could not be questioned by such a dealer. In view of the above, circular dated 10.2.2014 cannot be faulted. The assessment orders and revisional orders passed by the concerned authorities are liable to be set aside with liberty to the appropriate authority to pass fresh orders in the light of the legal principles enunciated - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Whether developers and builders are works contractors and whether agreements between them and prospective purchasers authorize the State to impose VAT.
2. Whether the method of valuation of VAT can include the value of land.
3. Validity of Section 42 and Section 9 of the Haryana VAT Act read with Rule 49 of the Haryana VAT Rules.
4. Whether the alternative remedy of appeal would debar the Court from entertaining the writ petitions.

Issue-wise Detailed Analysis:

1. Developers and Builders as Works Contractors:
The court examined whether developers and builders fall under the category of works contractors and whether agreements between them and prospective purchasers for constructing and selling flats authorize the State to impose VAT. The court referred to multiple precedents, including the landmark cases of *Larsen & Toubro Ltd.* and *K. Raheja Development Corporation*, concluding that developers and builders do indeed fall under the definition of works contractors. The court noted that the essential conditions for sustaining the levy of tax on goods deemed to have been sold in execution of a works contract were fulfilled in building contracts. Thus, the agreements between developers/builders and flat purchasers to construct flats and sell them with some portion of land involve an activity of construction covered under the term "works contract."

2. Method of Valuation of VAT Including Land Value:
The court addressed whether the method of valuation of VAT on such agreements can include the value of land. It was argued that the provisions of Explanation (i) to Section 2(1)(zg) of the Act and Rule 25(2) of the Haryana VAT Rules were ultra vires the Constitution as they allowed for the inclusion of the value of land in the taxable turnover. The court observed that the value of immovable property and any other thing done prior to the date of entering into the agreement of sale must be excluded from the agreement value. The value of goods in a works contract should be the value at the time of incorporation in the works, and VAT should be directed to the value of goods at the time of incorporation, not the transfer of immovable property. Consequently, Rule 25(2) was upheld by reading it down to exclude the value of immovable property, and the State Government was directed to amend the rules accordingly.

3. Validity of Section 42 and Section 9 of the Act and Rule 49 of the Rules:
The court examined the validity of Section 42 of the Act, which provides for joint and several liability of the contractor and sub-contractor for the tax. The court found that this provision safeguards the interest of the revenue and is not arbitrary or unreasonable. Regarding Section 9 and Rule 49, which pertain to the lump sum tax under the composition scheme, the court noted that the scheme is optional and provides administrative convenience. The court upheld these provisions, stating that once a dealer opts for the composition scheme, they cannot question the method of determining tax liability under these provisions.

4. Alternative Remedy of Appeal:
The court considered the preliminary objection regarding the maintainability of the writ petitions on the ground of alternative remedy. The court acknowledged that ordinarily, the availability of an alternative remedy would debar the court from entertaining the writ petitions. However, given the primary challenge to the vires of certain provisions of the Act and Rules, the court found it necessary to examine the issues raised. The court cited exceptions to the rule of alternative remedy, such as when the provisions of the statute are challenged as ultra vires or when the highest authority has taken a particular view on a question of law.

Conclusion:
The court partly allowed the writ petitions, setting aside the assessment and revisional orders passed by the authorities, with liberty to pass fresh orders in light of the legal principles enunciated. The court directed the State Government to amend the rules to exclude the value of immovable property from the taxable turnover. The court also upheld the validity of Section 42 and Section 9 of the Act and Rule 49 of the Rules, emphasizing that the composition scheme is optional and provides administrative convenience.