CA Dr Arpit Haldia

Arpit Haldia

This article aims to analyse various intricacies about taxation in the State of Rajasthan with respect to the builders and developers, who are under normal scheme of taxation and do not opt for composition scheme or payment of lump sum amount in lieu of taxes under section 5(1) of the Rajasthan Value Added Tax Act 2003.

1. Brief history of how the law has evolved and provisions on Builder and Developers in the State of Rajasthan

♣ Judgment of Hon’ble Apex Court in the matter of M/S Larsen & Toubro Limited & Anr vs State Of Karnataka & Anr on 26 September, 2013 and M/S K. Raheja Development … vs State Of Karnataka on 5 May, 2005

These two decisions lay down basic principles for levy of VAT on Builders and Developers. The ratio as laid down by Hon’ble Apex Court in the Judgment of M/S K. Raheja Development was referred for consideration to the Larger Bench of Apex Court in the Matter of Larsen and Toubro Limited Vs State of Karnataka. The decision in M/S K. Raheja was upheld by the Larger Bench of the Hon’ble Apex Court.

♣ Insertion of Rule 22A(1) to 22A(5) w.e.f. 14thJuly 2014 only prospectively and not retrospectively and applicability of provisions of erstwhile Rule 22 between the period 1st April 2014 to 13th July 2014:

Government of Rajasthan inserted Rule 22A(1) to 22A(5) in Rajasthan Value Added Tax Rules 2006 w.e.f. 14th July 2014. These rules provide method for computation of Tax Liability for Builder and Developer. Prior to insertion of this rule, then prevailing Rule 22 did not provide for specific deduction relating to builders and developers like value of immoveable property and stage of construction at which the agreement with the prospective purchaser was executed.

Concluding Paragraph from my earlier article on Analyzing principle for levy of VAT on builders and developers and Extent of their liability to pay VAT between 1st April 2014 to 13th July 2014 in the State of Rajasthan is as follows:

Therefore in the absence of clear provisions for deductions available to builders and developers and computation of tax liability thereon, albeit for a limited period between 1st April 2014 to 13th July 2014, RVAT Rules stands on similar footings similar to Haryana Value Added Tax Rules.

In my opinion, in the present scenario collection of taxes from builders and developers in the State of Rajasthan for the period between 1st April 2014 to 13th July 2014 would not be valid proposition as analyzed on the basis of principles laid down by Hon’ble Apex Court and Punjab and Haryana High Court. Further, applying the above principles as enunciated by Hon’ble Punjab and Haryana High Court, necessary changes would be required to be brought in law relating to builders and developers in the State of Rajasthan for the period between 1st April 2014 to 13th July 2014.

2. Whether Building Contracts entered into by builders and developers with prospective purchaser are works contract and whether definition of works contract provided in Rajasthan Value Added Tax Act is sufficient to cover Building Contracts under its ambit:

To understand the above matter we would have to refer to the issue before Hon’ble Apex Court in the matter of Larsen and Toubro Limited Vs State of Karnataka

“102. The crucial question would now remain: whether the view taken in Raheja Development with reference to definition of works contract in KST Act is legally unjustified? The following definition of works contract was under consideration before this Court in Raheja Development: works contract includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any moveable or immovable property.”

The Hon’ble Apex Court reproduced part of Judgment as pronounced in M/S K. Raheja Development … vs State Of Karnataka on 5 May, 2005 in Para No. 107 of the Judgement as follows:

“(i) The definition of the term works contract in the Act is an inclusive definition.

(ii) It is a wide definition which includes any agreement for carrying out building or construction activity for cash, deferred payment or other valuable consideration.”

The Hon’ble Apex Court then observed in Para 114 of the Judgement that

“114. In Article 366(29-A)(b), the term works contract covers all genre of works contract and it is not limited to one specie of the contract. In Raheja Development, the definition of works contract in KST Act was under consideration. That definition of works contract is inclusive and refers to building contracts and diverse construction activities for monetary consideration viz; for cash, deferred payment or other valuable consideration as works contract.”

The Hon’ble Apex Court then again in Para No. 116 of the judgement observed that

“We are in agreement with the submission of Mr. K.N. Bhat that since Raheja Development in May, 2005 almost all States have modified their laws in line with Raheja Development and there is no justification for change in the position settled after the decision of this Court in Raheja Development.”

The Hon’ble Apex Court finally held in Para No. 118 of the Judgement that

“118. We are clearly of the view that Raheja Development lays down the correct legal position and we approve the same.”

♣ Analysis of the Judgement with reference to the definition of Works Contract as provided in Rajasthan Value Added Tax Vis-à-vis Definition of Works Contract in Karnataka Sales Tax Act

The Definition of works contract in the State of Rajasthan as per Section 2(44) of the Rajasthan Value Added Tax Act 2003 as amended by Finance Act 2011 is as follows:

works contract” means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property;”

The definition of works contract provided in Karnataka Sales Tax Act and Rajasthan Value Added Tax Act covers almost similar activities and is broadly based on similar principle. Therefore, observation of the Hon’ble Apex Court on the definition of Works Contract under KST Act would be applicable to the definition under Rajasthan Value Added Tax Act.

Further it was also observed in the judgement that pursuant to the decision of the Hon’ble Apex Court in the matter of K Raheja almost all states modified the definition of works contract in line with the Raheja Judgement.

It would be appropriate to point out here that State of Rajasthan also modified and substituted earlier definition of works contract on similar lines of judgement of K Raheja vide Finance Act 2011.

Therefore as Hon’ble Apex Court has held that the Legislature has the power to levy tax on Builders and developers on the basis of the definition provided under the KST Act, it would also mean that on the basis of broadly similar definition of works contract provided under Rajasthan Value Added Tax Act, legislature in Rajasthan also had the power to levy tax on Builders since the substitution of the definition of works contract in the statute was on similar lines of K Raheja.

3. Exemption to Builders/Developers on the amount of consideration received upto 31stMarch 2014 with regard to the agreement made by them for construction of flats, dwelling units or buildings and other premises:

The State Government further vide notification No. F.12(59) FD/Tax/Div/2014-83 dated 30th July 2014 exempted from tax payable by builder and developers on the amount of consideration received up to 31.03.2014 with regard to the agreement made by them for construction of flats, dwellings or buildings or other premises.

Although State Government had the power as per the principle laid down by Hon’ble Apex Court in the judgement of Larsen and Toubro to tax the builders and developers but they exempted consideration received by them upto 31st March 2014.

Therefore, for the consideration received upto 31st March 2014, Builders and Developers have been exempted from Tax.

4. Construction Contracts for Builders and Developers: Sub-Rule 2 of Rule 22A: Rule 22A(2) of the Rajasthan Value Added Tax Rules 2006 provides that

“In case construction contract, where along with the immovable property, the land or, as the case may be, interest in the land, underlying the immovable property is to be conveyed and the property in the goods (whether as goods or in some other form) involved in the execution of the works contract is also transferred to the purchaser, such transfer is liable to tax under this rule.”

It would be appropriate here first to discuss that why there was a need to provide specific provision relating to construction contract which alongwith the immoveable property, transfer land or interest in land underlying the immoveable property. The requirement arose due to peculiar nature of the transaction as was held by the Hon’ble Apex Court in the matter of M/S Larsen & Toubro Limited & Anr vs State Of Karnataka & Anr on 26 September, 2013 that

“93. The question is: Whether taxing sale of goods in an agreement for sale of flat which is to be constructed by the developer/promoter is permissible under the Constitution? When the agreement between the promoter/developer and the flat purchaser is to construct a flat and eventually sell the flat with the fraction of land, it is obvious that such transaction involves the activity of construction inasmuch as it is only when the flat is constructed then it can be conveyed. We, therefore, think that there is no reason why such activity of construction is not covered by the term “works contract”.

Thus in the above backdrop of principle laid down by Hon’ble Apex Court, construction contracts which alongwith the immoveable property, transfer land or interest in land underlying the immoveable property have been provided for specifically in law.

Reason for providing such construction contracts separately in the law being, firstly such contracts involves transfer to the purchaser alongwith the immoveable property; land or interest in land underlying the immoveable property and property of the material involved in the execution of the construction contracts. However in other cases, works contractor only transfers ownership of material involved in the execution of the works contract to the purchaser. Secondly, these specific contracts are taxable from the point wherein agreement is entered between the purchaser and the builder/developer and prior to that there is no taxability.

Thus, some specific deductions had to be provided in the law in relation to such contracts to ensure that firstly, law only taxes the value of the goods incorporated from the point where in the agreement has been entered between the builder and the purchaser and secondly, it does not tax value of immoveable property.

Therefore as the situation exist regarding peculiar nature of construction contract which alongwith the immoveable property, transfer land or interest in land underlying the immoveable property as compared to other contract, it was essential that such activity should be provided separately in the law. Had the same not been provided separately in the law, it would have been very difficult to lay down the law to provide for deductions specific to such contracts and arrive at the taxable value of goods transferred in such contracts.

5. How to calculate the Tax Liability of a Builder/Developer in Rajasthan Value Added Tax:

ParticularsRuleValue
Gross Agreement ValueXxxx
Less: Value of Land as per Rule 58 of the Rajasthan Stamp Rules as on 1st Day of the year in which agreement was entered22A(3)Xxxx
Net Value after deducting the value of LandXxxx
Less: Deductions on account of Labour and Other Charges and profit thereon22A(1)Xxxx
Value (A)Xxxx
ParticularsRuleValue
Taxable Sales Price out of value (A) above as per Rule 22A(4)22A(4)
Goods Taxable@…….%Xxxx
Goods Taxable@…….%Xxxx
Gross Output Tax LiabilityXxxx
Less: Input Tax
Goods Taxable@…….%Xxxx
Goods Taxable@…….%Xxxx
Net LiabilityXxxx

6. Rule 22A(3):- Principle and Method for Measure of Value of Land to be deducted from the Gross value of the construction contract:

Hon’ble Apex Court in the matter M/S Larsen & Toubro Limited & Anr vs State Of Karnataka & Anr on 26 September, 2013 held that

“(xi) Taxing the sale of goods element in a works contract under Article 366(29-A)(b) read with Entry 54 List II is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of immovable property.”

It was held by Bombay High Court which was subsequently upheld by the Hon’ble Apex Court that

“The judgment in the second Gannon Dunkerley specifies the nature of such deductions which can be made from the entire value of the works contracts. This was permitted to the States as a convenient mode for determining the value of the goods in the execution of the works contract. Similarly, the cost of the land is required to be excluded from the total agreement value.”

Hon’ble Punjab and Haryana High Court in the matter of CHD Developers Limited vs State Of Haryana And Others on 22 April, 2015 held that :

The Hon’ble High Court while analyzing the provisions of Rule 25(2) of the Haryana Value Added Tax Rules observed in Para 39 that

“ 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.”

Construction contracts which alongwith the immovable property also transfers land or interest in land underlying the immoveable property have been provided separately in the law and once any contract falls in the given class of contract, then deduction of land has to be provided to such assessee carrying out construction contract. If specific provision for deduction of value of land would not have been provided then in such case, the law would failed the test laid down by the Hon’ble Apex Court as it would have sought to levy tax on transfer of immoveable property.

♣ Rule 22A(3):- Measure of Value of Land to be deducted from the value of the construction contract:

The said rule provide that the cost of land shall be determined in accordance with the rates as recommended or determined under rule 58 of the Rajasthan Stamps Rules, 2004, as applicable on the 1st January of the year in which the agreement to sell the property is made.

Now the important question arises here for consideration:

a) Why the year in which agreement to sell the property was made has been selected for the purpose of the arriving at the value of the land to be deducted from the value of construction contract

Hon’ble Supreme Court in the matter of M/S Larsen & Toubro Limited & Anr vs State Of Karnataka & Anr on 26 September, 2013 had clarified that

“activity of construction undertaken by the developer would be works contract only at the stage where the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government.”

Therefore, at the outset it is of paramount importance that agreement should have been entered between the developer and purchaser, for construction and transfer of immoveable property along with the land or interest in land underlying the immoveable property. Further, on and from the date of agreement being entered, transaction would be works contract and chargeable to tax.

Such agreement towards construction and transfer of immoveable property alongwith land or interest in land underlying the immoveable property, would include value of land as part of consideration. Therefore, to standardize the deduction of value of land, law fixed January 1 of the year in which agreement is entered as cut-off date to arrive at the value of land for deduction from the agreement value.

b) Is the mode prescribed for arriving at the value of land as per the rates determined under rule 58 of the Rajasthan Stamp Rules, 2004 appropriate and whether higher market value may be argued by the dealer:-

The prevailing law in Rajasthan does not prescribe any method, where the builder may argue that the value of land in the agreement is more than the value as arrived under Rule 58 of the of the Rajasthan Stamps Rules, 2004.

It may be pertinent here to highlight the relevant legal history and the perspective of State of Maharashtra as it is considered to be the mother law for taxation of builders and developers in India.

Following was the observation of the Hon’ble Apex Court in the matter of M/S Larsen & Toubro Limited & Anr vs State Of Karnataka & Anr on 26 September, 2013 about the judgement of Bombay High Court which upheld constitutional validity of Rule 58(1A) of the MVAT Rules:-

“The challenge was laid to Rule 58(1A) of the MVAT Rules before the Bombay High Court. The Division Bench of the Bombay High Court found that there was nothing to show that the proviso to the said provision was arbitrary. It held that the Legislature was acting within the field of the legislative powers in devising a measure for the tax by excluding the cost of the land. The Division Bench recorded the following reasons in repelling the challenge to Rule 58(1A).

Sub- rule (1A) stipulates that the cost shall be determined in accordance with the guidelines appended to the Annual Statement of Rates prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 as applicable on 1 January of the year in which the agreement to sell the property is registered. The Proviso stipulates that deduction towards the cost of land under the sub-rule shall not exceed 70% of the agreement value. The petitioners have not brought on the record any material to indicate that the proviso to sub- rule (1A) of Rule 58 is arbitrary.”

Hon’ble Apex Court in the matter held as follows:

“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. The mode of valuation of goods provided in Rule 58(1A) has to be read in the manner that meets this criteria and we read down Rule 58(1-A) accordingly. The Maharashtra Government has to bring clarity in Rule 58 (1-A) as indicated above. Subject to this, validity of Rule 58(1-A) of MVAT Rules is sustained.”

It would be pertinent here to highlight the condition with which the constitutional validity of Rule 58(1A) was upheld by the Hon’ble Apex Court

“Moreover, the Advocate General for Maharashtra clearly stated before us that implementation of Rule 58(1-A) shall not result in double taxation and in any case all claims of alleged double taxation will be determined in the process of assessment of each individual case.”

In pursuance of the above judgement further amendment was introduced in Rule 58(1A) of the Maharashtra Value Added Tax Rules, 2002 vide Notification No.VAT 1513/CR-147/Taxation-1, dated 29th January 2014 w.e.f. 20th June 2006 which provided an opportunity to the builder to challenge the methodology for ascertaining the value of land as per DLC Rates and claim higher value of land as deduction from the contract value:

“Provided that, after payment of tax on the value of goods, determined as per this rule, it shall be open to the dealer to provide before the Department of Town Planning and Valuation that the actual cost of the land is higher than that determined in accordance with the Annual Statement of Rates (including guidelines) prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995.  On such actual cost being proved to be higher than the Annual Statement of Rates, the actual cost of the land will be deducted and excess tax paid, if any, shall be refunded.”

Thus, through the amendment an option has now been provided to the builders in Maharashtra to argue that value adopted for deduction of value of land as per the prevailing DLC Rates as on 1st January is not appropriate and the land cost is actually on the higher side, therefore higher deduction on account of value of land should be provided.

However, the proviso similar to which was inserted in the Maharashtra Value Added Tax Rules 2002 on dated 29th January 2014 with retrospective effect from 20th June 2006 does not finds place in the scheme of rules in Rajasthan Value Added Tax.

This should have been incorporated in the rules so as to provide the assessee to put forward their case wherein, the actual value of land is more than the value prescribed under the Stamp Valuation Rules of State Government and to claim higher deduction.

c) Whether the deduction of land can be taken in the first year itself or has to be taken proportionately:

Although there is no such clarification in Rajasthan in this respect, however Trade Circular No. Build-Devep/Adm.Relief.06-10/Adtn-8, Mumbai, Dated 17/04/2014 Trade Circular No. 12T of 2014 issued by the Office of Commissioner of Sales Tax, Maharashtra threw light upon the same as follows:

“(10) Land cost deduction as per rule 58(1A) is available. Similarly, deduction is available towards subcontracted work, labour and other services under rule 58(1) and stage wise deduction under rule 58(1B). Can the dealer claim the entire deduction in the first month itself?

Ans. Deduction for land can be claimed in the first year or proportionately during the period of construction. For each return period, the deduction towards subcontracted work, labour and other services under rule 58(1) and stage wise deduction under rule 58(1B) has to be computed and claimed.”

However, it does makes sense that the cost of land is claimed as deduction in the initial years as the initial installments received from the purchasers are appropriated by the builders in recouping the cost of investment in the land. It’s only later installments which are appropriated towards the construction cost.

This clarification although not binding in the state of Rajasthan but would certainly be helpful in arguing the matter and provide option to the assessee for claiming deduction towards cost of land.

7. Rule 22A(1):- Principle and Method of providing deduction towards the Labour and other charges

This rule has been inserted w.e.f. 14th July 2014 to bring method of calculation of taxable turnover of Works Contractor on same lines which were pronounced by the Hon’ble Apex Court in the matter of Gannon Daunkerley & Co. & Ors vs State Of Rajasthan & Ors on 17 November, 1992. Individual head-wise explanation was provided by the Hon’ble Apex Court in the matter of Gannon Daunkerley & Co. & Ors vs State Of Rajasthan & Ors on 17 November, 1992. The below given clarifications provide the provision of the Rule and relevant part of judgement of Hon’ble Apex Court. The details are as follows:

Gross Value of the Contract:

Less:

(a) on which no tax is leviable under the Act;

(b) which has been exempted from tax;

Hon’ble Apex Court in the matter of Gannon Daunkerley & Co. & Ors vs State Of Rajasthan & Ors on 17 November, 1992 provided that

“We may, however, make it clear that apart from the deductions referred to above, it will be necessary to exclude from the value of the works contract the value of the goods which are not taxable in view, of Sections 3, 4 and 5 of the Central Sales Tax Act and goods covered by Sections 14 and 15 of the Central Sales Tax Act as well as goods which are exempt from tax under the sales tax legislation of the State. The value of goods involved in the execution of a works contract will have to be determined after making those deductions and exclusions from the value of the works contract”.

bb) on which tax has been paid by the sub-contractor:

This amendment was a long standing demand by the dealers and made with effect from 9th March 2015. The given provision has not been discussed in the judgement by the Hon’ble Apex Court in the matter of Gannon Daunkerley & Co. & Ors vs State Of Rajasthan & Ors on 17 November, 1992. It provides that when sub-contractor has paid the tax, main contractor would be exempted from payment of Tax. The reverse provision was prevalent in law but that was specific to the situation where exemption certificate had been taken by the main contractor on entire contract. The issues to be kept in mind while claiming deduction under this clause is as follows:

  • This deduction is only allowed in case of calculation of Tax under section 4(1) of the Rajasthan Value Added Tax Act 2003.
  • The assessee would have to satisfy himself that the works contractor has paid the due tax. This can be ensured firstly by deducting appropriate amount of TDS, securing the registration details of the sub-contractor and obtaining the copy of the VAT returns of the sub-contractor, securing an undertaking of the sub-contractor that the receipts from the main contractor has been included in the VAT Return. However, the law is silent on the process of how the main contractor would ascertain that the tax has been paid by the sub-contractor. However, more clarity on the given matter is required.

(c) labour and service charges for the execution of the works;:

(d) charges for planning, designing and architect’s fees;

(e) charges for obtaining on hire or otherwise, machinery and tools for the execution of the works contract;

(f) cost of consumables such as water, electricity, fuel used in the execution of works contract, where the property is not transferred in the course of execution of the works contract;

Hon’ble Apex Court in the matter of Gannon Daunkerley & Co. & Ors vs State Of Rajasthan & Ors on 17 November, 1992 provided that

“Keeping in view the legal fiction introduced by the Forty Sixth Amendment whereby the works contract which are entire and indivisible into one for sale of goods and other for supply of labour and services, the value of the goods involved in the execution of a works contract on which tax is leviable must exclude the charges which appertain to the contract for supply of labour and services. This would mean that labour charges for execution of works [item no (i)] amounts paid to a sub-contractor for labour and services [item No. (ii)], charges for planning, designing and architect’s fees [item No. (iii)], charges for obtaining on hire or otherwise machinery and tools used in the execution of a works contact [item No. (iv)], and the cost of consumables such as water, electricity, fuel etc. which are consumed in the process of execution of a works contract [item No. (v)] and other similar expenses for labour and services will have to be excluded as charges for supply of labour and services.”

(g) cost of establishment of the contractor to the extent to which it is relatable to the supply of the said labour and services:

Hon’ble Apex Court in the matter of Gannon Daunkerley & Co. & Ors vs State Of Rajasthan & Ors on 17 November, 1992 provided that

“…….various expenses which form part of the cost of establishment of the contractor. Ordinarily the cost of establishment is included in the sale price charged by a dealer from the customer for the goods sold. Since a composite works contract involves supply of materials as well as supply of labour and services, the cost of establishment of the contractor would have to be apportioned between the part of the contract involving supply of materials and the part involving supply of labour and services. The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of material involved in the execution of the works contract only can be included in the value of the goods.”

(h) other similar expenses relatable to the said supply of labour and services, where the labour and services are subsequent to the said transfer of property; and

(i) profit earned by the contractor to the extent it is relatable to the supply of labour and services:

Hon’ble Apex Court in the matter of Gannon Dunkerley & Co. & Ors vs State Of Rajasthan & Ors on 17 November, 1992 provided that

“The profits which are relatable to the supply of materials can be included in the value of the goods and the profits which are relatable to supply of labour and services will have to be excluded. This means that in respect of charges mentioned in item nos. (vii) and (viii), the cost of establishment of the contractor as well as the profit earned by him to the extent the same are relatable to supply of labour and services will have to be excluded.”

♣ Provision for allowance of ad-hoc deduction and rejection of above specific deductions as per books of accounts

Specific deductions as above can be rejected by the assessing officer on any of the three following reasons and in such a case an ad-hoc deduction provided under the rules as follows would be provided.

a) where the contractor has not maintained accounts which enable a proper evaluation of the different deductions as above or

b) where the assessing authority is of the opinion that accounts maintained by the contractor are not sufficiently clear and intelligible, or

c) where the deductions claimed by the assessee are considered to be unreasonable high in view of the nature of the contract.

The detail of ad-hoc deduction as provided in the law is as follows:

S. No .Type of contractLabour charges as a percentage of gross value of contract
123
1Fabrication and installation of plant and machinery.25
2Fabrication and erection of structural works of iron and steel including fabrication, supply and erection of iron trusses, purlins and the like.15
3Fabrication and installation of cranes and hoists.15
4Fabrication and installation of rolling shutters and Collapsible gates.15
5Civil works like construction of buildings, bridges, roads, dams, barrages, canals and diversions.30
6Installation of doors, door frames, windows, frames and grills.20
7Supply and fixing of tiles, slabs, stones and sheets.25
8Supply and installation of air conditioners and air coolers.15
9Supply and installation of air conditioning equipments including deep freezers, cold storage plants, humidification plants and dehumidors.15
10Supply and fitting of electrical goods, supply and installation of electrical equipments including transformers.15
11Supply and fixing of furniture and fixtures, partitions including contracts for interior decorators and false ceiling.20
12Sanitary fitting for plumbing and drainage or sewerage.20
13Laying underground or surface pipelines, cables or conduits.30
14Supply and erection of weighing machines and weigh-bridges.15
15Painting, polishing and white washing.25
16All other contracts not specified from serial number 1 to 15 above.25

This deduction as per the above table has to be calculated on the value of the agreement left after deducting value of land and quantum of tax charged separately by the contractor, if the contract provides for separate charging of tax.

Thus, in a nutshell, either deduction has to be allowed as per books of accounts and in case assessing officer believes otherwise, then deduction has to be allowed as % from the above table, on the value left after deducting value of land from entire agreement value and quantum of tax charged separately by contractor, if the contract provides for separate charging of tax.

8. Principle behind providing deduction related to stage at which agreement is entered between the Builder and the Purchaser:

To understand the very basis of providing such deduction it would be appropriate here that we refer to the relevant para of the judgement of the Hon’ble Apex Court in the matter of Larsen and Touboro Vs State of Karnataka as follows:

“activity of construction undertaken by the developer would be works contract only at the stage where the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government.”

It was further provided that

“If at the time of construction and until the construction was completed, there was no contract for construction of the building with the flat purchaser, the goods used in the construction cannot be deemed to have been sold by the builder since at that time there is no purchaser. That the building is intended for sale ultimately after construction does not make any difference.”

Hon’ble Apex Court provided in the above judgement that construction of immoveable property wherein alongwith immoveable property, land or interest in underlying land is also transferred to the purchaser, would be a works contract and chargeable to tax only from the stage at which agreement was entered.

The simple reason would be that the goods incorporated prior to the execution of the agreement cannot be deemed to have been sold to anybody as there was no buyer. From the point wherein agreement is entered, buyer comes into picture and entire construction from that point onwards is for and on behalf of the buyer and would be chargeable to tax.

a) Rule 22A(4): Measure of Value of Deduction of stage at which the agreement is entered between the Builder and the Purchaser:

“Where the dealer who undertakes the construction of flats, dwellings or buildings, premises and transfers them in pursuance of an agreement along with the land or interest underlying the land, then after deductions under sub-rule (1) and (3) from the total agreement value, the sale price shall be determined depending upon the stage at which the agreement with the purchaser is entered, according to the limits laid down in Column 3 for the type of contract specified in Column 2 of the table given below:

S. No. Stage at which the developer enters into a contract with the purchaserAmount to be determined as value of agreement
1.Up to completion of plinth level95%
2.From plinth level to completion of 100% RCC framework.85%
3.From completion of RCC framework to Occupancy Certificate55%
4.From Occupancy certificate till the completion of construction.Nil

Some of the possible scenarios are as follows:

Situation 1: If agreement is entered between purchaser and builder/developer at a stage upto completion of plinth level, then in such case 95% of the agreement value left after providing deduction under Rule 22A(3) and Rule 22A(1) of the Rajasthan Value Added Tax Rules would be the sales price for arriving at the value chargeable to tax.

Situation 2: If agreement is entered between purchaser and builder/developer at a stage from plinth level to completion of 100% RCC framework, then in such case, 85% of the agreement value left after providing deduction under Rule 22A(3) and Rule 22A(1) of the Rajasthan Value Added Tax Rules would be the sales price for arriving at the value chargeable to tax.

Situation 3: If agreement is entered between purchaser and builder/developer at a stage from completion of RCC Framework to Occupancy Certificate, then in such case, 55% of agreement value left after providing deduction under Rule 22A(3) and Rule 22A(1) of the Rajasthan Value Added Tax Rules would be the sales price for arriving at the value chargeable to tax.

Situation 4: If agreement is entered between purchaser and builder/developer at a stage from Occupancy Certificate to completion of the construction, then in such case the agreement value would be not be chargeable to tax as there was no agreement till the occupancy certificate.

Resultant price after providing abovementioned stage specific deduction would be taxable sales price with regard to the taxation of goods to arrive at the output tax liability. Further, Input Tax Credit of the goods would also be allowed from the point where in agreement is entered between the purchaser and the builder/developer. No credit would be allowed for any goods purchased prior to the agreement.

b) Certification of stage at which the agreement is entered between the Builder and Purchaser:

Prevailing Law in Rajasthan does not prescribe methodology to ascertain that at which stage of the building, agreement between the builder and the purchaser was entered. It would be appropriate here to refer the relevant provisions in Rule 58(1A) of the Maharashtra Value Added Tax Rules, 2002 vide Notification No.VAT 1513/CR-147/Taxation-1, dated 29th January 2014 w.e.f. 20th June 2006

“b)  For determining the value of goods as per the Table clause (a), it shall be necessary for the dealer to furnish a certificate from the Local or Planning Authority certifying the date of completion of the stages referred above and where such authority does not have a procedure for providing such certificate then such certificate from a registered RCC consultant.”

Till any such mechanism has been provided in the law in Rajasthan, assessee might take a clue from the above rule and a certificate from the RCC Consultant may be obtained and kept in record, to be produced at the assessment stage before the assessing officer to substantiate his claim.

Law prevailing in Rajasthan should specify mechanism to ascertain the stage at which the agreement has been entered between the builder and the developer otherwise, it would only result into unending litigation between the department and the assessee that whether the assessee has claimed correct deduction in respect of the stage of agreement.

c) Whether a builder can adopt profit plus method wherein the taxable value of the goods incorporated is arrived by adding profit to the cost of the goods incorporated in the contract:

Although the law in Rajasthan is silent in this respect, however Trade Circular No. Build-Devep/Adm.Relief.06-10/Adtn-8, Mumbai, Dated 17/04/2014 Trade Circular No. 12T of 2014 issued by the Office of Commissioner of Sales Tax, Maharashtra threw light upon the same as follows:

“Ans. Discharging the tax liability by applying the method of Cost of material plus Gross Profit has been discarded by the Hon. Bombay High Court by its judginent in Writ petition 2440 of 2012 dated 30/10/2012. In this respect, Trade Circulars 18T of 2012 dt. 26/09/2012 and 7T of 2014 dt. 21/02/2014 are already issued.

The Next query was as follows:

“(24) The profit attributable to the cost of the goods incorporated in the contract shall be deemed to be equal to 20% of such cost.

Ans. Trade Circulars 18T of 2012 dt. 26/09/2012 and 7T of 2014 dt. 21/02/2014 have already been issued. No method other than the statutory method is allowed to discharge the tax liability in case of works contract.”

It would be appropriate here to highlight the relevant text of the judgement of the Hon’ble Bombay High Court in the matter of Builders Association Of India vs The State Of Maharashtra on 30 October, 2012 as referred in the above clarification

“Where the Legislature has an option of adopting one of several methods of determining assessable value, it is trite law that the legislature or its delegate can choose one among several accepted modalities of computation. The legislature while enacting law or its delegate while framing subordinate legislation are legitimately entitled to provide, in the interest of uniformity, that a particular method of computation shall be adopted. So long as the method which has been adopted is not arbitrary and bears a reasonable nexus with the object of the legislation, the Court would not interfere in a statutory choice made by the legislature or by its delegate. In the present case, rule 58(1A) mandates how the value of goods involved in the execution of a construction contract at the time of the transfer of property in the goods is to be determined in those cases where contract also involves a transfer of land or interest in land.

Plainly, rule 58(1A) does not permit the developer to take recourse to a method of computation other than what is specified in the provision.”

Thus provisions similar to Rule 58(1A) of MAVT Rules also find place in Rule 22A of the Rajasthan Value Added Tax Rules 2003. They both provide for deduction on the line of the judgement of the Hon’ble Apex Court in the matter of Gannon Daunkerley & Co. & Ors vs State Of Rajasthan & Ors on 17 November, 1992. Thus profit plus method or any other method would not be applicable and only specific method as provided in law would be applicable.

Conclusion: The article is an attempt to provide a detailed overview on the subject but there is a requirement to amend the law to provide clarification about certain key issues and unless otherwise provided in the law, it would only result in litigations and demands being created against the assessee. The law should be clear and unambiguous about the rights of the assessee and how it seeks to levy tax on the goods incorporated.

Posted Under

Category : GST (2055)
Type : Articles (10773)
Tags : CA Dr Arpit Haldia (24) Delhi VAT - DVAT (358) MVAT (499) pvat (169) Vat (134)
  • Prem Chhatpar

    Alternate view possible:
    a. Para 34 of BHC order in MVHI case, Para 121 of SC order in L & T, CREDAI BHC judgment have clarified that the amendment made to the MVAT Act has been upheld but the question as to what constitutes “works contract” has been left open to be decided by Assessing authorities on the facts of each case. This legal position has been admitted by the MVAT authorities in Ashok Gokani’s case decided by BHC on 30/12/2012 but as yet DDQs preferred have been deliberately not been decided to avoid chances of grant of prospective effect atleast if not distinguishment on the ground that an Agreement to Sell is not a works contract – Every case/business model is not on the lines of K.Raheja which was upheld by SC.
    b. Assotech Realty and Magus Construction High court cases not cited at all nor any cognisance taken off.
    c. Levy of Service tax has been upheld on the ground that Explanation inserted wef. 1/7/2010 creates a fiction that construction carried on hitherto for self by the Builder (as held in Magus) would be deemed to be carried on for and on behalf of the prospective flat BUYER. Fiction in one Act cannot be extended to another Act and the need for introduction of fiction was felt because in law, it is not construction for and on behalf of the Flat buyers.
    d. Article 366(29A)(b) is generic in nature and with the widest ambit and superficial cosmetic amendments to the definition of works contracts by various States is meaningless and redundant – the BHC judgment has clearly stated that the amendment is clarificatory of the examples of various types of works contracts and inclusive definition is a necessity otherwise contracts for activities not mentioned therein by way of example, would have gone scotfree e.g Printing. Any works contract if it is a works contract in the first place would be liable to tax regardless of the definition in the State law.
    e. If a Builder/Developer is a “contractor” for the Flat buyers and the Contractors to whom any particular activity is outsourced – plumbing, RCC slabs, Electrical contractors are also contractors, the distinction between Builder/Developer and a Contractor vanishes. Everyone is a contractor for someone or the other. What about the applicability of Section 40a(ia) ? Would be TDS deductible by a Flat buyer who is covered by Section 44AB? Who would be eligible for Section 80IB, if everyone is a “Contractor”

    Please refer Park View Enterprise 189 ITR 190 (Mad), which is a precursor to the K.Raheja judgment and explains why K.Raheja lays down the correct law on the facts of that case but if facts and finding is different, K.Raheja or Larsen & Toubro would not be universally applicable, a warning caveat sounded in para 34 of BHC and para 121 of SC order. The interest in the land was transferred to the flat buyer first and thereafter, construction was being carried on for and behalf of the flat buyer with lien being held over the land and in case of default on constuction payments, the deal would stand cancelled. This is the finding given in K.Raheja. Otherwise, there was/is no need to go through the Agreements – just go by the stage at construction has reached. If flat booked, while under construction, the same Agreement to Sell is said to be a “works contract” and if construction is completed and Completion certificate is received, the Builder when he executes the same proforma Agreement to Sell, the same Agreement is said to be for Transfer of Immovable property – chameleon characteristic.

    The L & T judgment is a fit case for filing of curative petition if it is interpreted as laying down a universal law regardless of the facts.

    • vswami

      “Who would be eligible for Section 80IB, if everyone is a
      “Contractor” ”

      Point of doubt has been rightly raised! In fact, that may be found quite convincingly answered/ instantly cleared, should anyone care to, – not stop short of / being bogged down to – ‘works contract’- but read through the entire section in one go. As has n stressed repeatedly- see case law , – as a general proposition, that is
      the only one way to rightly understand/interpret any enactment properly drafted.

      As commented once long ago (wprt a write-up in Economic Times),
      and thence forward as oft repeatedly said, Raheja’s is one of those instances in which the ‘twin agreement’ gimmicks, was
      wrongly adopted, simply for saving on ‘stamp duty’; albeit in blatant breach of underlying scheme of the ‘special state law’ (cross refer, for a better appreciation, among others, the published critique on SC Judgment in Podar Cement case); also, read the 2015 SC judgment.

      Pithily stated, had the implications of the governing special
      law , applicable to FLAT (or APARTMENT), been kept in focus, on DAY ONE – that is, when the lopsided idea / obnoxious concept of ‘works contract’ came to be first mooted, the prevailing muddled /confusing state of affairs , now standing worse confounded, could have been easily avoided /averted.

      Open / INVITE to EDIT

  • vswami

    This write-up, as is personally viewed, may have to be updated , for the common good. The author may consider doing so having regard
    to the further developments; mainly the implications of the Del. HC judgment in
    Bansal’s case.

    Do so, also keeping in focus the levies of VAT and
    Service tax, proposed to be continued in the new Code on GST pending
    legislation.

    Last but not least, rather more importantly, he will do
    well to take into consideration also the fresh but altogether different angles
    / viewpoints sought to be covered and canvassed for, in several feedback input,
    displayed on this website, so also on Facebook and Linkedin, So as to ensure
    that the suggested update is comprehensive and complete, for serving the
    intended purpose, for the benefit /to the advantage of taxpayers.

    Over, with a similar INVITE, to other experts on VAT and
    Service tax laws, with due exposure through specialized field practice.

    TAIL Note: The levies also on undertakings qualifying for
    sec 80 IB income-tax exemption, made a mention of in the subject article of the
    learned author, calls for a special attention and insightful consideration in
    the context herein.

  • Prem Chhatpar

    My comments to the Taxguru article stand vindicated with the observations in Bansal’s Service tax judgment that it is the fiction inserted from 1/7/2010 that triggers liability to service tax and not the fact that such Agreements to sell flats under construction are “works contracts” per se under general law.

    However, despite this fact, Delhi HC has proceeded on the footing that such Agreements to sell are “works contracts” as per Larsen (on the contrary, para 115 says that it is be determined on the facts of the case) and hence, the Valuation Rules do not provide for a deduction for land and hence, there is no mechanism provision to back the charge – hence the charge fails.

    Once Larsen judgment is understood in true light, automatically, the agreement to sell would stand to be classified under extended Construction service post Explanation and not as works contract. So question of application of Rules for Determination of value of services under Works Contract would not be applicable at all – question of providing for deduction for land does not arise.

    In K.Raheja, they had sought to evade stamp duty on the value of construction and even in Tamil Nadu that was the case prior to introduction of additional entry 5 in Schedule to Stamp Act. Reference is invited to Park View Enterprise 189 ITR 190 (Mad) which is a precursor to the K.Raheja judgment. In that case also, Land was apparently sold first and thereafter, construction was started for and on behalf of the current Land buyer (actually the Flat buyer). In such a case, the sale of land was covered by Entry 25 of the Schedule to the Stamp Act and the value of construction of the super structure thereon was covered by entry 5 newly inserted to plug the loophole.

    Reference is also invited to the three possibilities mentioned in Halsbury’s Laws of England and reported in 189 ITR 190:

    “It would be useful to refer to para 656 at page 435 of Vol. 44 of 4th Edition of Halsbury’s Laws of England which throws up 3 possibilities:
    “A conveyance on sale of building plot may present difficulties of assessment where a building has been erected by the time the conveyance is executed.
    i. Where the builder is the vendor but the building contract is expressed to be conditional on the completion of the purchase of the site, the consideration paid for the building (as distinct from the site) does not attract duty, even though the builder may have begun to build before completion.
    ii. If the builder is not also the vendor, the consideration paid for the building does not attract duty even where the landowner and the builder habitually act together.
    iii. If, however, there is in substance a contract to purchase the plot with the building on it (even though the contract is constituted by separate documents), the consideration for the building attracts duty.”

    Reference can also be made to Kimbers and Co. v. IRC [1936] 1 KB 132 in which it was held that, when a vendor of land contracts to build a house and sell, it was not a contract for sale of a house and the land on which it stood, but constituted separate transactions; they being a contract of sale of land and a contract to build a house thereon, and therefore, the duty to be imposed is only upon land and not on the value of the building to come up, as per the Stamp Act, 1891, applicable to immovable properties. On interpreting the contract of sale involved therein, it was held that there are two distinct contracts, one absolute and the other conditional in nature.

    However, where the Land sale is not complete but only a facade and the land sale is conditional upon the consideration being duly received for the construction portion, it cannot be said that land was in substance sold and construction undertaken thereafter. In such a case, stamp duty would be payable on the combined value of the land and building as one Immovable property. (ie. possibility No. iii as per Halsbury’s Laws of England cited above). There are no twin contracts but only one for the sale of land and building when duly constructed.

    An agreement to Sell can be construed as a “works contract” only if the sale of land is absolute and thereafter construction is undertaken as a Contractor for and on behalf of the Land buyer (i.e prospective flat buyer). In Maharashtra, such contracts are never entered and the question of levy of VAT does not arise. However, if one were to go by this legal position, then Bansal’s judgment can be overturned by SC and service tax can be upheld as was held in MCHI’s case by the Bombay High Court.