C.A. Prem T. Chhatpar
Sales tax / VAT is either payable on sales of “goods” or on deemed sales within the meaning of Article 366(29A)(b) of the Constitution on the value of goods transferred in the execution of a works contract. To constitute a “works contract”, there should be two parties to the contract which should be for construction of Flats, etc on behalf of the contractee under a contract for construction and not for self. The transfer of property in goods should take place immediately upon appropriation of the goods to the contract. No powers have been conferred on the State Government under Entry 54 of the State List to levy tax on transfer of interest in immovable property as was held in Builders Association of India’s case 73 STC 370 (S.C.).
The controversy started after the Government of Maharashtra amended Explanation b(ii) to the definition of “Sale” in Section 2(24) and proceeded to list out the various types of works contracts like the building, construction, etc. so as to derive the benefit of K. Raheja Development Corporation 141 STC 298 (S.C).
The constitutional validity of the provisions in the Act, Rules, and the Composition scheme as they stand on the Statute book has been upheld by the Bombay High Court vide order dated April 10, 2012. The Court held that the amendment ex-facie did not transgress the boundaries of Article 366(29A)(b), and was clarificatory in nature of the legislative intent to tax works contracts of various nature referable to Article 366(29A)(b). Thus, the amendment was held to be superfluous and the Constitutional boundaries as drawn vide the 46th Constitutional amendment continued to be sacrosanct.
There is a vital distinction between proceedings for testing the constitutional validity of the provisions and petitions / appeals arising out of assessment proceedings. The Court has directed the Assessing authorities to determine the contracts which constitute “works contracts.” However, the judgment is being misinterpreted as having empowered the State Government to tax indiscriminately all transactions in the Real Estate sector without first ascertaining whether they constitute works contracts or not. Builders are also under the erroneous impression that with the MCHI ruling dated 10/4/2012, VAT on sale of Flats under construction has become applicable unless relief is provided by the Supreme Court on the SLP filed recently by the MCHI. However, as informed, the real test of applicability of VAT lies in assessment proceedings on case to case basis. If applicability of tax in a particular case is dependent on the facts of the case, then answers to the vexed question should not be expected by way of writ petition. Readers would be aware that Assotech Realty 2007 (7) S.T.R. 129 (All.) was set aside by the Supreme Court on technical ground that in the absence of facts, “these questions were not capable of being decided in writ petition” by the Allahabad High Court. Hence, it would be improper to treat the MCHI judgment as being on facts and in my humble opinion, it would be futile to expect a verdict from the Supreme Court too on the real question, which contracts constitute “works contracts”, a question that can be decided only out of proceedings arising out of assessment / appeal proceedings.
The possibility of contracts being Agreements to Sell immovable property (and hence beyond the ambit of VAT) cannot be ruled out as observed in Larsen & Toubro’s case while placing the observations in K. Raheja’s case before the Larger Bench of the Supreme Court. K Raheja’s case has been distinguished in Assotech Realty 2007 (7) S.T.R. 129 (All.) and Magus Construction P. Ltd. 2008 (11) S.T.R. 225(Gau.).
The mere fact that the earlier Stay against recovery of dues and direction not to treat the Builders as “Dealers” liable to registration has got vacated with the disposal of the writ petition does not mean that automatically, all Builders, not being “Works contractors” are mandatorily liable to registration. Trade Circular 14T dt. 6/8/2012 has been issued directing Builders to apply for registration by 16/8/2012, file returns by 31/8/2012 along with payment of taxes and interest. Considering the normal business model adopted by Builders in Maharashtra, in all probability, most of the contracts are classifiable as Sales of Immovable property. While a works contract can be vivisected to segregate the value of the goods transferred in the course of execution of the works contract, the same does not hold true for contracts for sale of immovable property. There should be a works contract in the first place and as held in K Raheja’s case, the provisions of MOFA /KOFA are not relevant in deciding the nature of the contract.
The Circular adopts a carrot and stick policy and grants an incentive to the Builders to treat contracts for sale of immovable property as taxable, although in principle they are not taxable so as to enjoy set off of taxes paid on purchases of building material and construction machinery, that would otherwise have not been be eligible to them.
It is also noticed that VAT is being inadvertently paid at 1% under the Composition scheme u/s 42(3A) even on sales of Flats that have been fully constructed. Unfortunately, the Circular No. 14T dated 6/8/2012 has maintained a studied silence on this although the legal position had been clarified beyond doubt in the earlier Trade Circular dated 7/2/2007, K. Raheja’s judgment and the MCHI judgment dated 10/4/2012.
To summarize, in my humble opinion,
1. VAT on Sale of immovable property is not payable – Looking to the business model of Builders in Maharashtra, Agreements for sale entered into cannot be classifiable as Works contracts and their vivisection into Material / Labour / or even Land cannot be done. Article 366(29A)(b) only permits vivisection of Works contracts.
2. The MCHI judgment has only upheld the constitutional validity of the provisions as they stand on the statute book – the Department has been directed to ascertain which contracts constitute works contracts and for which finding of fact is essential to be brought on record. The MCHI judgment which was by way of a writ petition cannot be construed as a Judicial precedent on facts, which can only be established in DDQ / assessment proceedings.
3. In my view, if the Builders decide to play safe and opt for administrative relief and pay up taxes, it is upto them to take a call. However, if they play safe with Flat buyers’ money, then it would be unfair since the real question about whether tax is payable on such types of contracts has not been decided in the MCHI judgment given on writ petition and was not arising out of assessment proceedings. In fact, in view of the fact that the amendment has been held to be merely clarificatory in nature and does not add to the State’s power to tax and the limitations and restrictions on the power of the State Government to tax only works contracts continue, there is no reason that the earlier DDQs and Tribunal decisions that have been decided in the Builder’s favour would not be applicable, facts remaining the same.
4. With the issuance of Trade Circular No. 14T of 2012 dt. 6/8/2012, the State has bared its intentions of collecting taxes in a hurried manner on transactions that are per se non-taxable without establishment of the authority of law to collect tax thereon.
(Author can be reached at [email protected])