2024 (6) TMI 386 - HC - VAT and Sales Tax

Rejection of returns - determination of taxable turnover on best judgment basis - levy of VAT at the applicable rates on the consideration received by the petitioners from their customers by treating the transactions as works contracts - absence of a machinery provision in the KVAT Rules that provides for the exclusion of the value of land from the total turnover, for the purposes of determining the taxable turnover - allowance of deduction of 22.5% of the contract receipt as deduction towards value of land. HELD THAT - While the charging section Section 6 of the KVAT Act specifies the rate of tax applicable to the works contract in question, the determination of the turnover on which the tax is to be levied, at the said rate, is to be in the manner prescribed under the KVAT Act and Rules. The Scheme for determining the taxable turnover under the KVAT Rules is to begin with the total amount received or receivable by the dealer for the execution of the works contract and then deduct therefrom the amounts expressly mentioned in Rule 10 (2) (a) of the KVAT Rules. The formula in the Rules is thus for the purposes of determining the taxable turnover pertaining solely to the transfer of goods involved in the execution of the works contract. In a situation where, as under the KVAT Act and Rules, there is no contemplation of inclusion of the land value in the value of the works contract undertaken, the absence of a machinery to exclude such land value from the total turnover so as to arrive at the taxable turnover, cannot be seen as rendering the machinery provision under the KVAT Rules unworkable - it was for the petitioner companies to have provided the turnover relatable to the works contract undertaken by them, by reducing the portion attributable to the undivided share of land from the amounts received by them from the customers, and then arrive at the taxable turnover by applying the formula under Rule 10. Thus, in the absence of a statutory Scheme similar to what obtains in the State of Maharashtra or Haryana referred above, we are of the view that it was incumbent upon the petitioner/assessees to declare the total turnover contract receipts pertaining solely to be works undertaken by them, without including therein the component representing the value of the undivided share in the land - The statutory Scheme for determining the taxable turnover of a works contract under the KVAT Act does not suffer from any defect so as to render it unworkable to effectuate the charge to tax on a works contract - The contentions of the learned senior counsel for the petitioner/assessees rejected on the said issue. In the absence of any document produced by the petitioner to show the actual land value included in the contract receipts, the above methodology can be adopted by the Appellate Tribunal to determine the taxable turnover of the petitioner assessees for the assessment years 2008-09 and 2009-10 respectively. For this limited purpose, therefore, it is deemed appropriate to remand O.T. Rev. Nos. 105, 106 and 107 of 2019 to the Appellate Tribunal for a fresh determination of the taxable turnover of the respective petitioners in those cases for the assessment years in question. Revision disposed off.

Issues Involved:
1. Exclusion of land value from taxable turnover.
2. Applicability of Supreme Court and High Court decisions.
3. Mode of valuation of works contract.
4. Deduction towards land cost.
5. Determination of taxable turnover in absence of books of accounts.
6. Demand of VAT on works contract beyond value of goods transferred.

Summary:

Issue 1: Exclusion of land value from taxable turnover

The petitioners argued that in the absence of machinery to exclude the value of land from the 'taxable turnover' u/s KVAT Rules, the levy of tax on the sale of flats remains unenforceable. The court rejected this argument, stating that the statutory Scheme for determining the taxable turnover under the KVAT Act does not suffer from any defect and it was incumbent upon the petitioners to declare the total turnover without including the land value.

Issue 2: Applicability of Supreme Court and High Court decisions

The petitioners contended that the Tribunal disregarded the decisions in CCE vs. Larsen and Toubro and Suresh Kumar Bansal vs. UoI, which held that in the absence of a statutory mechanism to ascertain the measure of tax in composite contracts involving the sale of land, tax cannot be imposed. The court, however, did not find the argument persuasive and upheld the statutory provisions under the KVAT Act.

Issue 3: Mode of valuation of works contract

The petitioners argued that the mode of valuation of 'works contract' under Rule 10 of the KVAT Rules should meet the criteria laid down by the Supreme Court in Larsen and Toubro vs. State of Karnataka. The court maintained that the KVAT Rules do not need to specifically deal with the value of the undivided share in the land, as it is not contemplated for inclusion in the definition of 'turnover' of the works contract.

Issue 4: Deduction towards land cost

The petitioners claimed that the deduction towards land cost at only 5% of the contract receipt was arbitrary and contrary to the material available on record. The court agreed with this contention and remanded the cases (O.T. Rev. Nos. 105, 106, and 107 of 2019) to the Appellate Tribunal for a fresh determination of the taxable turnover based on a reasonable methodology.

Issue 5: Determination of taxable turnover in absence of books of accounts

The Tribunal upheld the assessing authority's decision to determine the taxable turnover as per Rule 10 (2) (b) of the KVAT Rules in the absence of production of books of accounts. The court found no fault with this approach, given the petitioners' failure to maintain trading accounts.

Issue 6: Demand of VAT on works contract beyond value of goods transferred

The petitioners argued against the demand of VAT on the works contract beyond the value of the goods transferred, solely on the ground that books and accounts were not produced. The court upheld the demand, emphasizing that the petitioners had not provided the necessary documentation to ascertain the actual expenses incurred.

The O.T. Revisions were disposed of with the direction to the Appellate Tribunal to complete the exercise of determining the taxable turnover afresh within six months, based on the observations in this judgment.

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