Stamp Duty from Allottees on alleged ‘Conveyance/ Transfer’ of Superstructure of an Apartment/unit built by a Builder patently illegal
Much before the introduction of GST, a controversy arose as to whether the Builder/ Developer builds a building, intended for sale, on his own behalf or on behalf of the prospective purchasers. In short, the controversy was whether Service Tax & Vat could be levied on the transactions relating to allotment of built up spaces by the Builder/ Developer. The Hon’ble Apex Court in the cases of K. Raheja Development Corporation v. State of Karnataka (2005) 5 SCC 162 & M/S Larsen & Toubro Limited & Anr vs State Of Karnataka & Anr. (2013 (9) TMI 853 Supreme Court) upheld the Government stand that these transactions do fall under the category of ‘Works Contract’ & are exigible to Vat & Service tax. Accordingly, the Allottees/ Builders were made liable to pay the Central/ State taxes applicable to ‘Works Contract’.
The Apex Court in K. Raheja (supra) held as under:
“To be also noted that the definition does not lay down that the construction be on behalf of an owner of the property or that the construction cannot be by the owner of the property. Thus even an owner of the property enters into an agreement to construct for cash, deferred payment or valuable consideration a building or flats on behalf of anybody else, it would be a works contract within the meaning of the term as used under the said Act.”
The Apex Court, in the aforesaid case, further held:
“Thus the appellants are undertaking to build as developers for prospective purchaser. Such construction/development is to be on payment of a price in various instalments set out in the agreement. As the appellants are not the owners they claim a “lien” on the property. Of course, under clause they have right to terminate the agreement and to dispose of the unit if the breach is committed by the purchaser. However merely having such a clause, does not mean that an agreement ceases to be a works contract within the meaning of the term in the said act. All that this means that if there is a termination and that particular unit is not resold but retained by the appellants, there would be no works contract to that extent. But so long as there is no termination the construction is for and on behalf of the purchaser. Therefore, it remains a works contract within the meaning of the term as defined under that said Act. It must be clarified if the agreement is entered into after flat or unit is already constructed, then there would be no works contract. But so long the agreement is entered into before the construction is completed it would be works contract.”
In the case of both K. Rajeha Development Corporation v. State of Karnataka & Larsen & Tuobro, Vat on Works contract was charged by the Karnataka State Government but no Stamp Duty was ever demanded by the Karnataka State on the superstructure, knowing well that the transfer of title of the superstructure was by way of ‘accession’ as the transactions were in the nature of ‘Works Contract’ & not sale of a real estate property. As far as the proportionate area of land attributable to the apartment of the Allottee was involved, sale deed of the entire land of the project was executed in favour of the Residents Welfare Society wherein each Allottee had his proportionate share. The Allottees became the owner of the superstructure through the ‘Agreement’. As far as the transactions, aforementioned, the various duties paid were justified & in accordance with the judicial norms & the declaration of Law as declared by the Apex Court (supra).
It will not be out of place to mention that as per Section 2(119) of the CGST Act, 2017 as ‘works contract’ means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.” As per the GST (Goods and Services Tax) law, construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer is a supply of service and hence, is liable to the goods and services tax (GST) as a ‘Works Contract’.
What constitutes a ‘ Works Contract’ & ‘ Contract for Sale’ is not Res integra in view of the law declared by the larger bench decisions of the Apex Court in M/s Kone Elevator India (P) Ltd Vs State of Tamil Nadu & Others (2014 (5) TMI 265 – SUPREME COURT) & M/s Larsen & Toubro Limited & Another Vs State of Karnataka & Another (2013 (9) TMI 853 Supreme Court).
The basic characteristics of Works Contract, as spelt out by the Apex Court in a catena of cases can be summed up as follows:
1. In Works contract the articles produced as a whole are never the absolute property of the maker, although materials used in the work contract may have been maker’s absolute property.
2. Property in goods contained in a works contract pass by accession during the procession of work.
The Apex Court, in the aforesaid cases of K. Raheja & Larsen & Toubro (supra) found that these 2 essential characteristics were predominantly present in the transactions made by these companies and therefore unhesitatingly declared them as ‘Works Contract’. However, the issue of exigibility of State Stamp Duty on these transactions was not dealt by the Apex Court as it was abundantly crystal clear that these transactions could not be subjected to Stamp Duty, they being ‘Works Contract’ wherein the ownership of the superstructure vested with the Allottee on payment of entire instalments & with the handing over of possession by the Builder.
It is undisputable that a transaction in immoveable property can either be a sale of immovable property attracting Stamps Duty or a Works Contract attracting GST but by any stretch of imagination it cannot be both. Once the Apex Court has held that the transactions are in the nature of ‘Works Contract’, no Stamp Duty is payable on these transactions.
If the Government levies stamp duty on the superstructure of the Apartment/ commercial unit, being Works Contract, on the same analogy, MES/ CPWD & other Government authorities, who get constructions done through Open Tenders would also be required to get the sale deed of the superstructure executed in their favour to become absolute owners. This is neither practical or nor legal.
However, the paradox is that in most of the other states, while the purchaser pays GST on the entire sale consideration, he is FORCED to pay Stamp Duty on the Land element as well as on the market value of the Superstructure. This is against the provisions of Law & the declaration of Law, as declared time & again by the Apex Court & the various High Courts. Imposition of Stamp Duty on the alleged transfer of Superstructure by most of our states (except Karnataka) is also violative of Article 14 of the Constitution in as much as there is blatant violation of the Article 14 of the Constitution. There cannot be discrimination between similar transactions, in different states, especially when the overriding GST Act & Stamp Act are the same.
Imposition of Stamps Duty on these transactions also tantamount to DOUBLE TAXATION, which is impermissible under Article 265 of the Constitution. Double taxation in the strict legal sense means taxing the same property or subject matter twice, for the same purpose, for the same period and in the same territory. To constitute double taxation, the two or more taxes must have been (1) levied on the same property or subject matter, (2) by the same Government or authority, (3) during the same taxing period, and (4) for the same purpose. The Apex Court in the case of Sri Krishna Das vs Town Area Committee, Chirgaon 1991 AIR 2096, 1990 SCR (2) has inter-alia declared the law in respect of Double Taxation. Moreover, Article 265 of the Constitution of India provides that “no tax shall be levied or collected except by the authority of law”. Once the Apex Court has declared these transactions to be in the nature of ‘ Works Contract’, Stamp Duty cannot be levied treating them as sale of Real Estate Property. Such a levy/ payment/ demand of Stamp Duty would be without authority of law.
The Allottees pay Stamps Duty due to ignorance of Law & due to fear of transfer of incomplete title without a Registered Sale Deed. The Banks also demand Sale Deed as collateral security for sanction of Home Loan. The Development Authorities & Housing Boards throughout the country have issued circulars & Government Orders to make it mandatory for the Allottees to get their sale deeds executed in their favour from the Builders. Whenever a deed for certifying legal possession is presented in the office of the State Stamp & Registration Department, they immediately demand Stamp Duty on the land component as well as the superstructure. Whenever the Builders have filed a representation to the Government or filed a petition in the Court against the illegal levy of Stamp Duty, the same has been discarded/ dismissed as the Builder is not the ‘Affected Party’. It is required that the Allottees or Association of Allottees file a Writ Petition before the Jurisdictional High Court praying for knocking down the illegal levy of Stamp Duty.
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