A Preamble: – The subject of works contract is one of the most confusing and litigated issues. The Constitution (Forty Sixth Amendment) Act, 1982 granted powers to State Governments to enact laws for providing the levy of tax on the transfer of property (whether as goods or in some other form) involved in the execution of works contracts. Builders and Developers undergo untold hardship and misery while computing the gross and taxable turnovers. Each State has prescribed its own law, rules and methodology for determining the gross and taxable turnovers. There are many conditions that are stipulated while there are umpteen laws that a builder/developer has to comply with. In this legal maze the question that arises is – Can a builder/developer contend that the true essence of the agreements that he enters into is for sale of an immovable property? In this paper I have attempted to analyse the pros and cons of such transactions.
Before I proceed to understand the taxability of the transactions and in order to appreciate and understand the issues raised the following judgments are relevant:
K. Raheja Development Corporation vs. State of Karnataka (141 STC 298) (SC)
In this judgment:
The appellant, which carried on the business of real estate development and allied contracts, entered into development agreements with owners of lands. It got the plans sanctioned and after approval constructed residential apartments and/or commercial complexes. In most cases before construction it entered into agreements with the intending purchasers. The agreement provided that on completion of the construction the residential apartment or the commercial complex would be handed over to the purchasers, who would get an undivided interest in the land also. The appellant was entitled to terminate the agreement and dispose of the unit if a breach was committed by the purchaser. The owners of the land would transfer the ownership of the land directly to a society which was being formed under the Karnataka Ownership Flats (Regulation of Promotion of Construction, Sales, Management and Transfer) Act, 1974. The question was whether the appellant was a dealer and liable to pay turnover tax under the Karnataka Sales Tax Act, 1957, in relation to the construction contracts with the purchasers as “works contracts”:
The Hon’ble Supreme Court held that:
(i) under section 2(1)(v-i) of the Karnataka Sales Tax Act the definition of “works contract” was very wide and was not restricted to a “works contract” as commonly understood, viz., a contract to do some work on behalf of someone else. It also included “any agreement for carrying out either for cash or for deferred payment or for any other valuable consideration, the building and construction of any movable or immovable property. The definition took within its ambit any type of agreement wherein the construction of a building took place either for cash or deferred payment or valuable consideration;
(ii) therefore, even if the appellant was owner to the extent that it had entered into agreement to carry out construction activity on behalf of someone else for cash, deferred payment or other valuable consideration, it would be carrying out a works contract and would become liable to pay turnover tax on the transfer of goods involved in such works contract. Further, there was no distinction under the Karnataka Sales Tax Act between construction of residential flats and construction of commercial units, and a works contract within the meaning of the term in that Act could also be for construction of commercial units. For the purpose of considering whether the agreement amounted to works contract or not the provisions of the Karnataka Ownership Flats (Regulation of Promotion of Construction, Sales, Management and Transfer) Act, 1974, would have no relevance;
(iii) the appellant was undertaking to build for the prospective purchaser on payment of price in various instalments set out in the agreement. Though the appellant was not the owner it claimed a lien on the property and it had the right to terminate the agreement and to dispose of the unit if a breach was committed by the purchaser. Merely because such a clause was included in the agreement, the agreement did not cease to be a works contract within the meaning of the term in the Act. So long as there was no termination the construction was for and on behalf of the purchaser and, therefore, the agreement remained a ‘works contract” within the meaning of the term as defined in the Act. So long as the agreement was entered into before the construction was complete, it would be a works contract; and
(iv) however, if the agreement was entered into after the flat or unit was already constructed, there would be no works contract.
The law laid down by the Hon’ble Supreme Court in K. Rahejas’ case (141 STC 298) was a subject matter of challenge before the Hon’ble Supreme Court in the case of Larsen and Toubro Limited & Another vs. State of Karnataka & Another (2008-VIL-29-SC). The Hon’ble Supreme Court while delivering the judgment on 19-8-2008 in the Larsen and Toubro’s case observed “Be that as it may, apart from the disputes in hand, the point which we have to examine is whether the ratio of the judgment of the Division Bench in the case of Raheja Development Corporation (supra) as enunciated in Para 20, is correct. If the Development Agreement is not a works contract could the Department rely upon the second contract, which is the Tripartite Agreement and interpret it to be a works contract, as defined under the 1957 Act. The Department has relied upon only the judgment of this Court in Raheja Development Corporation (supra) case because para 20 does assist the Department. However, we are of the view that if the ratio of Raheja Development case is to be accepted then there would be no difference between works contract and a contract for sale of chattel as a chattel. Lastly, could it be said that petitioner company was the contractor for prospective flat purchaser. Under the definition of the term “works contract” as quoted above the contractor must have undertaken the work of construction for and on behalf of the contractor for cash, deferred or any other valuable consideration. According to the Department, Development Agreement is not works contract but the Tripartite Agreement is works contract which, prima facie, appears to be fallacious. There is no allegation that the Tripartite Agreement is sham or “bogus.”
Based on the above finding the Hon’ble Supreme Court placed the matter before the Honourable Chief Justice of India for re-consideration of the K Rahejas’ case by a larger bench.
Comments in the background of the judgement of the K. Rahejas’ case cited above:
It can be noticed that the Hon’ble Supreme Court has rendered its decision in the backdrop of an “agreement to carry out the construction activity on behalf of another person”. It appears that the Hon’ble Supreme Court did not examine the issue relating to an “Agreement for sale” of an immovable property. It is also necessary to keep in mind the peculiar clauses in the Rahejas’ case. The point to be noted is that a Developer is a principal contractor on behalf of the customer or prospective buyer. Thus, if the Developer enters into a construction agreement with the prospective buyer (customer) before the construction is complete (before obtaining the occupation certificate from the appropriate authorities) it would amount to a works contract liable to tax in the hands of the Developer / Principal. However, if the developer enters into an “Agreement for Sale” or executes an “Absolute Sale Deed” after the construction is complete – it can be contended that such “sale” is a “sale of immovable property” not liable to tax under the sales tax / VAT laws. Without prejudice to whatever is stated above the facts/ratio of the K. Raheja’s case cannot be blindly applied in case of single agreement concept. This is because, the law laid down in the K Raheja’s case completely revolved around the clause in that Agreement whereas the clauses in the “Agreement for Sale” with the customers may be completely different. Therefore, the judgment of the K Raheja’s case cannot be applied in the case of an agreement entered into by the developer with the customer / prospective buyer for sale of an immovable property under a ‘single agreement’ or ‘agreement for sale’.
Now that the vexed issue arising out of the K. Rahejas’ is placed before the larger bench for re-consideration, in my view that on merit ‘Agreement for sale’ of an immovable property could be held to be not taxable. However, the Hon’ble larger Bench of the Supreme Court will have a final say on the issue.
Recently, the Hon’ble Karnataka High Court had an occasion to examine a similar issue in the case of Total Environment Building Systems Pvt Ltd wherein a reassessment order was passed and taxes were levied. On a writ petition filed by the said Company before the Hon’ble Karnataka High Court (vide Writ Petition No. 19283 – 19294 / 2009, dated 15-7-2009), the Hon’ble Karnataka-High Court had passed an interim order by granting stay in respect of recovery proceedings against the re-assessment order and had directed the Commercial Tax Department to await the decision of the larger bench of the Supreme Court as noticed in Larsen & Toubro Limited vs. State of Karnataka reported in 1 7 VST 460. It now appears that this interim order passed by the Hon’ble Karnataka High Court has been taken up for further hearing and arguments are being advanced by the Counsels of the Appellant i.e., Total Environment Building Systems Pvt Ltd.
Assotech Realty Pvt Ltd vs. State of Up and Another vide Writ Petition No.1238 of 2006 (reported in 2007-TIOL-297-HC-ALL-CT)
In the Assotech’s case the Hon’ble
Allahabad High Court observed that in the K Rahejas’ case:
“The agreement provided that K. Raheja Development Corporation, as developer on its own behalf and as developer of such person, would construct the flats as a unit, ultimately to belong to such person. K.Raheja Development Corporation were constructing the unit for and on behalf of the person who had agreed to purchase the flats”.
However, in the Assotechs’ case the Hon’ble Allahabad High Court held that:
“We find that the Petitioner is constructing the flats/apartments not for and on behalf of the prospective allottees but otherwise. The payment schedule would not alter the transaction. The right, title and interest in the construction continue to remain with the petitioner. It cannot be said that the constructions were undertaken for and on behalf of the prospective allottees and, therefore, the constructions in question undertaken by the petitioner would not fall under clause (m) of Section 2 read with Section 3F of the Act and are outside the purview of the provisions of the Act. In other words, they cannot be subjected to tax under the Act and the action in imposing tax on such constructions treating them to be works contract, is wholly without jurisdiction. We are, therefore, of the considered opinion that the impugned orders dated 24-3-2006 and 29-5-2006, passed by the Assistant Commissioner, Trade Tax, Sector I, Noida, respondent No. 2, insofar as they relate to imposition of tax on construction of apartments/houses/flats and other construction in question, are wholly without jurisdiction and they cannot be sustained and are hereby set aside”.
Comments in the background of the judgment of the Assotechs’ case cited above:
1. A subtle factual distinction was brought out by the Hon’ble Allahabad High Court while delivering the judgment in the Assotechs’ case, on the issue that was before the Hon’ble Apex Court, in the K. Rahejas’ case. The Hon’ble Allahabad High Court observed that in the K. Rahejas’ case the appellants were constructing the unit for and on behalf of the person who had agreed to purchase the flats”. Whereas in the Assotechs’ case the ‘petitioner is constructing the flats/apartments not for and on behalf of the prospective allottees but otherwise. The payment schedule would not alter the transaction. The right, title and interest in the construction continue to remain with the petitioner. It cannot be said that the constructions were undertaken for and on behalf of the prospective allottees and, therefore, the constructions in question undertaken by the petitioner would not fall under clause (m) of Section 2 read with Section 3F of the Act and are outside the purview of the provisions of the Act”.
2. Agreements wherein the land and building are conveyed to the purchaser (assuming stamp duty is paid on such conveyance) are deemed to be transfer of immovable properties and not liable to tax under the VAT/Service Tax laws. This is a highly debated issue and the department in many States have not accepted such transactions as one for sale of an immovable property. However, one can place reliance on the Assotechs’ case cited above and contend that such transactions are not liable for payment of VAT/Service tax. In fact, the arguments can be further strengthened, if the “Letter of Allotment” issued by builder/ developer to the purchaser contains similar clauses that came to be relied upon by Assotech Realty Pvt Ltd before the Allahabad High Court.
3. It may be noted that the Hon’ble High Court of Karnataka while delivering the judgment in the case of Larsen & Toubro Limited vs. State of Karnataka (WP. No. 16305/ 2006(T-KST) on 10th July, 2007 has not followed the law laid down by the Allahabad High Court in the Assotech’s case. I am given to understand that Larsen & Toubro have pursued the matter before the Hon’ble Supreme Court of India. I believe that the judgment of the Hon’ble Supreme Court in the Larsen & Toubro’s case as and when delivered will settle this vexed issue.
4. The State of UP filed a special leave petition before the Honourable Supreme Court vide CC-11480-11481/2007 in respect of the High Court judgment in the Assotech’s case. The Hon’ble Supreme Court set aside the judgement of the High Court with liberty to the appellant to move the appellate authorities on the following grounds:
• That the appellant ought to have filed a First Appeal, since a writ petition against an order of assessment was not maintainable.
• That the nature of right conferred on the allottees of flats/consideration for payments of installments/whether construction was on its account or on behalf of the allottees were not matters to be decided in a writ.
The Hon’ble Supreme Court did not decide the legal issue arising out of the High Court order. However, the matter was to be decided by the appellate authorities on facts. Therefore, it appears that the issue in the Assotech’s case will be a prolonged legal battle.
5. In case of “Agreements for Sale’ where land is conveyed by the landowner and the constructed portion is conveyed by the Developer to the Purchaser, the issue relating to taxability of such transactions under the tax law arises. Land being an immovable property is not liable for payment of sales tax. However, when the Developer agrees to construct on behalf of the Purchaser the liability to pay tax can arise as held by the Hon’ble Supreme Court in the K Rahejas’ case. It must be noted that, when constructions are carried out through independent contractors on behalf of the Developer, the contractors will also be liable for payment of works contract tax.
A situation can also be visualized wherein the Developer himself can act as a contractor. In this situation, the department has been construing the Developer in dual capacity (a) Contractor, and (b) Owner/Builder and subjecting such transactions to tax. In this scenario, the department has been subjecting such Developers to tax on the contract values, while the stamp duty is normally paid on the “land and building” conveyed to the prospective buyer.
In the above two scenarios the law laid down by the Hon’ble Supreme Court in the case of Hindustan Shipyard Ltd vs. State of Andhra Pradesh (119 STC 533) is very relevant. The Hon’ble Supreme Court had an occasion to interpret the difference between a works contract and a transaction of sale as under:
The appellant (“the builder”), engaged in the activity of building ships for different ship owners, entered into contracts agreeing with the owners to build, launch, fit, equip, test and complete in all respects a specified number of vessels at its shipyard and to deliver them. The building of the vessels was to be under the instructions and test of classification surveyors and in accordance with plans and specifications. The builder had to furnish all labour, machinery, materials, equipment, spare parts and outfit required for the construction of the vessels to make them completely ready. The price of each vessel was fixed but was to be paid in instalments at different stages. Before the vessel was delivered trial runs had to be made after notice to the owners. The contract provided that after successful trial test the owner shall accept the vessel. Title and risk of the vessel was to pass to the owner upon acceptance when delivery was effected and until such delivery the vessel and equipment thereof were at the entire risk of the builder. Delay in payments of the instalments of the price beyond a certain period entitled the builder to rescind the contract and refund the instalments already paid. Article 15 of the contract provided that the vessel as constructed, the engines, boilers, and machinery at all times became the property of the owner immediately after payment of the first instalment, and the owner, to the extent of the payments made by him, had a right to mortgage his interest in the materials for obtaining loans. Article 16 provided that in the event of the builder defaulting in the construction of the vessel – the owner could at his option take possession of the vessel and enter into contract with other builders to complete the vessel. Article 17 provided that the vessel would be at the risk and expense of the builder until handed over and accepted by the owner and the builder had to keep insured at its own cost for all builder’s risks. Any insurance moneys recovered on damage being sustained was to be applied for the reinstatement of the vessel. If any insurance money was received on destruction of the vessel or total or constructive total damage, the builder was to refund to the owners the monies paid by them. The question was whether the transaction was a “sale” or only a “works contract” for the purpose of sales tax under the Andhra Pradesh General Sales Tax Act, 1957. The High Court held that the transaction was a “sale”. On appeal to the Supreme Court (emphasis supplied):
The Hon’ble Supreme Court in the Hindustan Shipyard’s case held, affirming the decision of the High Court, that the contracts in question involved “sale” of the respective vessels within the meaning of section 2(n) of the Andhra Pradesh General Sales Tax Act, 1 957, and were not merely “works contracts” as defined in section 2(t), and the transactions were exigible to sales tax as such. The property in the goods passed from seller to the buyer only on the vessels having been built fully were delivered to the buyer; the vessel at the time of delivery has to be completely built up and seaworthy whereupon only the owner would accept delivery. All the machinery, materials, equipment, appurtenance, spare parts and outfit required for the construction of the vessel were to be purchased by the builder out of its own funds. Neither any of these nor the hull was provided by the owner. Though under Article 15 the items mentioned therein became the property of the owner simultaneously with the payment of the first instalment, other clauses generally, and Articles 16 and 17 immediately, went to show that for all practical purposes the property in the vessel continued to remain with the builder and passed to the owner only (i) on satisfactory completion of the work, (ii) the vessel coming into existence in a deliverable state, and (iii) satisfaction of the owner as to the vessel being seaworthy and built in accordance with the terms and conditions of the contract (emphasis supplied).
Applying the ratio of the above decision of the Hon’ble Supreme Court it can be argued that:
• The transaction in question is one of “sale” of an immovable property and not one of works contract;
Even assuming that the property in the goods is passed on to the Purchaser, the immovable property passes to the Purchaser only on completion of construction of the immovable property when the Purchaser accepts delivery / possession; It is important to note that there is no transfer of property of goods involved in execution of works contract;
• The goods involved belong to the Developer;
• Both on facts and in law, the property in goods remain with the Developer and it passes to the Purchaser only on completion of construction and the immovable property becomes ready for delivery/possession.
Thus, it can be argued that the transaction in question is clearly one for sale of an immovable property and not a works contract.
The Hon’ble Supreme Court in the Hindustan Shipyard’s case further held:
It is not the meaning of an individual recital or the inference flowing from any term or condition of the contract read in isolation but an overview of the contract wherefrom the nature of the transaction covered thereby has to be determined (emphasis supplied).
It is difficult to lay down any rule or inflexible rule applicable alike to all transactions so as to distinguish between a contract for sale and a contract for work and labour (emphasis supplied).
The Hon’ble Supreme Court in the Hindustan Shipyard’s case further observed:
Transfer or property in goods for a price is the linchpin of the definition of “sale”, Whether a particular contract is one for sale of goods or for work and labour depends upon the main object of the parties found out from an overview of the terms of the contract, the circumstances of the transaction and custom of the trade (emphasis supplied).
If the bulk of material used in construction belongs to the manufacturer who sells the end-product for a price, then it is a strong pointer to the conclusion that the contract is in substance one for the sale of goods and not one for labour. However, the test is not decisive. It is not the bulk of the material alone but the relative importance of the material qua the work, skill and labour of the payee which have to be weighed. If the major component of the end-product is the material consumed in producing the chattel to be delivered and skill and labour are employed for converting the main components into the end-products, the skill and labour are only incidentally used, the delivery of the end-product by the seller to the buyer would constitute a sale (emphasis supplied).
The parties in any case normally enter into an “Agreement for Sale” of an immovable property and the essence of the transaction is not one for “sale of goods”. If it were to be so, there is no need for entering into an “Agreement of Sale”. A contractor / contractee relationship can be said to be in existence when the contractor works on a chattel belonging to a contractee. Normally, the Developer is working on his own chattel with his own material. Thus, the question of execution of a works contract and therefore, the relationship of a contractor/contractee cannot be said to be in existence.
In the case of State of Andhra Pradesh vs. Kone Elevators (India) Ltd. (140 STC 22)(SC) while reversing the decision of the Andhra Pradesh High Court in State of A.P. vs. Kone Elevators (India) Ltd.  115 STC 96 is very relevant. The Honourable Supreme Court in the Kone’s case observed/held:
There is no standard formula by which one can distinguish a “contract for sale” from a “works contract”. In a “contract for sale” the main object is the transfer of property and delivery of possession of the property, whereas the main object in a “contract for work” is not the transfer of the property but it is one for work and (labour. In judging whether (lie contract is for a “sale” or for “work and labour”, the essence of the contractor the reality of the transaction as a whole has to be taken into consideration. The predominant object of the contract, the circumstances of the case and custom of the trade provides a guide in deciding whether the transaction is a “sale” or a “works contract”. Essentially, the question is of interpretation of the “contract”. It is settled law that the substance and not the form of the contract is material in determining the nature of the transaction (emphasis supplied).
Comment: It may be noted that in case of ‘Agreement of Sale’:
• The predominant object is for sale of an apartment and not for execution of a works contract.
• The reality of the contract is one for sale of an immovable property.
• If one were to interpret the agreement of sale entered into by the builder/developer with the prospective buyer the substance of the contract would clearly indicate that the transaction is one for sale of an immovable property.
The Hon’ble Supreme Court further observed:
The respondent filed returns of turnover for sales tax under the Andhra Pradesh General Sales Tax Act, 1957, of elevators and lifts installed by it for the period April to July 1995, claiming composition of tax under section 5G read with section 5F on the basis that the nature of the work undertaken by it constituted “works contract” involving manufacture, supply, installation and commissioning of elevators and lifts. The department rejected the claim and assessed the turnover at the rate specified in entry 82 of the First Schedule to the Act, as lifts. On appeal, the Sales Tax Appellate Tribunal accepted the claim of the respondent holding that the turnover related to the manufacture, supply, fabrication and erection involved in a works contract and that the transaction did not amount to a contract of sale; and, accordingly, directed the department to allow composition of tax under section 5G read with section 5F. The High Court rejected the revision application of the department. On appeal to the Supreme Court: –
Held, reversing the decision of the Appellate Tribunal and the High Court,
(i) that under the contract of the respondent with the customer, the entire onus of preparing and making ready the site for installation of the lift was on the customer, and the respondent would not undertake installation of the lift if the site was not ready. The respondent reserved the right to charge the customers for delay in providing the facilities. The respondent was only to bring the lift to the site in knocked-down state and assemble and install it. The major component into the end-product was the material consumed on producing the lift to be delivered and the skill and labour employed for converting the main components into the end-product was only incidentally used and the delivery of the end-product by the respondent to the customer constituted a “sale” and not a “works contract” and, therefore, the transactions constituted “sales” and taxable at the rate specified in entry 82 of the First Schedule to the Act and section 5G was not applicable; and
(ii) that the brochure of the respondent indicated that it was in the business of manufacturing various types of lifts, namely, passenger lifts, freight elevators, transport elevators and scenic lifts; and these were sold in various models and in various colours, capacities and voltage. Therefore, the respondent satisfied the requirement that it should carry on business.
Comment: The brochure of the Developer/ Builder will normally clearly indicate that they are involved in the business of development of immovable properties for “sale”. Thus, the Kone Elevators case is squarely applicable to all Builders/ Developers.
Kone Elevator India Pvt Lid, Tamil Nadu vs. State of Tamil Nadu (reported in 15 VST 457) moved the Hon’ble Supreme Court on the grounds that:
The question raised for consideration in these petitions is whether manufacture, supply and installation of lifts are to be treated as ‘sale’ or ‘works contract’. As the writ petitions filed by the petitioners have raised important questions of law, the matters have been directed to be placed before a three-judge Bench.
The petitioner (Kone Elevators India Private Limited, Tamil Nadu, raised the above question while referring to a series of cases including the law laid by the Hon’ble Supreme Court in State of Andhra Pradesh vs. Kone Elevators (India) Ltd. (140 STC 22)(SC). The Hon’ble Supreme Court (15 VST 457) observed:
In State of Andhra Pradesh vs. Kone Elevators (India) Ltd. (140 STC 22)(SC), it was held that such a contract constituted a ‘sale’ and does not amount to ‘works contract’ and the element of service provided by the vendor of the elevator was negligible. The learned Senior Counsel submitted that having regard to the nature of the contracts, the said view was not correct. Our attention was drawn to series of decisions rendered by this court in State of Rajasthan vs. Man Industrial Ltd.  24 STC 349, State of Rajasthan vs. Nenu Ram  26 STC 268 & Vanguard Rolling Shutters & Steel Works vs. Commissioner of Sales Tax, U.P  39 STC 372, which take a contrary view. The said decisions have not been noticed in Kone Elevators (India) Ltd. (140 STC 22)(SC) [Emphasis supplied].
The learned counsel appearing for the States of Gujarat, Uttar Pradesh, Andhra Pradesh and Tamil Nadu submitted that the decision in Kone Elevators (India) Ltd. (140 STC 22)(SC) was correctly decided and placed reliance on Hindustan Shipyard Ltd. vs. State of Andhra Pradesh  119 STC 533 (SC). They also submitted that the petitions under article 32 are not maintainable. The respondents would be at liberty to raise these contentions also when the matters are finally heard [Emphasis supplied].
Having regard to the issues involved in these matters and apparent conflict in the views expressed by three-judge Benches of this court, we refer these matters to a Constitution Bench. Registry will take further steps to post before the Constitution Bench [Emphasis supplied].
Thus, the matter is now pending before the Supreme Court to be taken up by the Constitution Bench.
In the case of Magus Construction Pvt. Ltd. and Another vs. Union of India and Others  15 VST 17 the Hon’ble Guwahati High Court while delivering the judgment on May 15, 2008 followed the judgment in the case of Assotech Realty Private Limited vs. State of Uttar Pradesh [20071 8 VST 738 (All) and held as follows:
In the case of the petitioner the petitioner was not shown to have undertaken any construction work for and on behalf of proposed customer/allottees and the title, in the flat/apartments so constructed, passed to the customer only on execution of sale deeds and registration thereof. Until the time the sale deed was executed, the title and interest, including the ownership and possession in the constructions made, remained with the petitioner. Further the circular dated August 1, 2006 makes it clear that when a builder, promoter, or developer undertakes construction activity for its own self then in the absence of relationship of “service provider” and “service recipient” the question of providing any service to any person by any other person does not arise at all. The construction activities which the petitioners had been undertaking were in respect of the petitioners’ own work and it was only the completed construction work, which was sold by the petitioner-company to the buyers, who might have entered into agreements for sale before the construction had actually started or during the progress of the construction activity or at the end or completion of the construction activity. Any advance, made by a prospective buyer, or deposit received by the petitioner, was against consideration of sale of the flat/building to such prospective buyer and not for the purpose of obtaining “service” from the petitioner.
Applying the ratio of the above decision of the Hon’ble Guwahati High Court in respect of an “Agreement for Sale” it becomes clear that:
• The transaction in question is one of “sale” of an immovable property and not one of works contract;
• Even assuming that the property in the goods passed to the customer! prospective buyer, the immovable property passes to the customer / prospective buyer only on completion of construction of the immovable property when the customer/prospective buyer accepts delivery/possession; It is important to note that there is no transfer of property of goods involved in execution of works contract;
• The goods involved belong to the Developer/ Builder;
• Both on facts and in law, the property in goods remain with Developer/Builder and it passes to the customer/prospective buyer only on completion of construction and the immovable property becomes ready for delivery/possession.
The vexed issues arising out of the above judgments will find an answer as and when the Larsen and Toubro’s case cited above is decided by the larger bench of the Hon’ble Supreme Court.
C GENERAL ISSUES
1. Single agreement concept
A single “Agreement for Sale” reflects the true nature of the transaction between the landowner/developer and the Purchaser. It can be argued that transactions involving transfer of immovable property attracting payment of Stamp duty cannot be subjected to tax on sale of goods or services attracting VAT or Service Tax. In order to strengthen one’s case, one could consider registration of the “Agreement for Sale” with the sub registrar. It is possible, that the department will contend the transaction to be taxable. In order to mitigate the impact of taxes it is advisable to have an all-inclusive price as far as the purchaser is concerned. The “Agreement for Sale” or any other documents / brochure etc., must not indicate any collections from customers towards taxes, since taxes are not being collected. In order to mitigate the hardship on account of levy of taxes, if any, by the department at any future date, it is advisable to maintain adequate bank deposits, equivalent to or higher than the tax amounts. Some developers also feel that an “undertaking” from the customer would suffice. Some others are also looking at escrow accounts wherein the monies collected as “deposits” can be deposited to take care of possible future litigations.
The concept of “single agreement” is yet to be tried and tested. Litigation is a certainty in this situation. The Courts are yet to lay down a sustainable guideline in a “single agreement” scenario. The matters are also yet to be tested by the developers. Therefore, the developers may be guarded. in adopting the “single agreement” concept. The builders/developers may also feel that indirect taxes are passable to the customers and therefore take a stand as to why look at a scenario which has to be litigated.
2. General practice followed by developers
Most of the developers are still following the two agreements concept- one for sale of undivided share of land and the other for construction. In the last few months some of the developers have started trying out the concept of “single agreement” theory. But I was given to understand that the prices are determined by the developers by taking into consideration the possible future litigation and also on the premise that customers may not pay the taxes at a future date in case the litigation fails, and Courts fail to accept the “single agreement” concept.
3. Various options and the best option available
a. Single agreement concept
A single “Agreement for Sale” reflects the true nature of the transaction between the landowner/developer and the Purchaser. This, in my view is the best option. However, the law, in this method is yet to settle down since we do not have a legal sanction. The risk is higher in this methodology but I believe that it must be a workable proposition. Litigation is a certainty in this model.
b. Regular method of paying taxes
This is a tried and tested method. It has the sanction of law and would be a cumbersome process but the impact of taxes can be minimized if properly planned at the project inception stage. It is a generally advisable method of payment of taxes.
c. Composition method of paying taxes
This is a hassle free method of paying taxes. It has the sanction of law but it is tied up with various conditions and restrictions. One needs to take a call on a case-to-case basis before opting for payment of taxes under this scheme.
I have made an attempt in this paper to analyse the legal issues that may arise on account of the single agreement concept. I presume that this paper will throw open many new issues and controversies for discussions. The Hon’ble delegates may raise different issues, which may need further interpretation to the issues raised by me.
The conclusion reached and views expressed in this note are matters of views/opinion. The views expressed herein are the views of the author and do not necessarily reflect the views of tax administrators/Courts/Assessing Officers etc.
[Source : Paper presented in two days National Tax Conference held at Jamshedpur on 29-30 August, 2009]
Author: CA S. Venkataramani, Partner, Singhvi, Dev & Unni, Bangalore