Advocate Kaushal Agarwal
Recently, there were some reports in newspapers in the State that the sales tax department is trying to impose VAT on sale of flats (which is an immovable property) by builders considering it to be Works contract.
But, the legal position at present is that, in Jharkhand, VAT is not applicable on builders who are executing only “Sale Agreements” and are not executing any Development Agreement, Construction Agreement, Tripartite Agreement etc. as are being done in other states like Maharashtra, Karnataka etc.
The below opinion summarizes the legal position which shows the difference between the Sale of Flat as Immovable Property and Works Contract in Jharkhand vis-à-vis other states:
1) THREE (3) PARTIES MUST FOR A SALE OF FLAT TO BE CONSIDERED AS WORKS CONTRACT
That, for defining building/ development of Immovable Properties as “Works Contract”, there must be three (3) parties involved. In the Case of M/s K. Raheja Development Corporation and M/s Larsen & Toubro Limited, there were three (3) parties involved. One Party was the “owner” of the Land, Second Party was the “Developer” and Third Party was the “Customer”. In their respective cases, the Owner and the Developer had entered into a Construction Agreement, Development Agreement and also a Tripartite Agreement among the above 3 parties to sell Flats etc., to a Third Person.
That, the above ruling has been given in the case of M/s Larsen & Toubro Limited & Anr. vs. State of Karnataka & Anr. Civil Appeal No. 8672 of 2013. The Hon’ble Supreme Court of India observed:
Quoting Paragraph 101(i) of the above Judgement:
“For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, three conditions must be fulfilled: (one) there must be a works contract, (two) the goods should have been involved in the execution of a works contract and (three) the property in those goods must be transferred to a third party as goods or in some other form”
From the above ruling of the Hon’ble Supreme Court, it is clear that for execution of Works Contract, there must be three (3) parties.
That, in general cases in Jharkhand, there are no three (3) Parties, but only two (2) parties are present, i.e. the “Builder” and the “purchaser”. In general cases in Jharkhand, there is no tripartite agreement, no development agreement and no construction agreement executed, but only a Sale Agreement is executed. There is no third (3rd) Party present in general cases in Jharkhand as required for a Works contract as per the Judgment delivered by the Hon’ble Supreme Court in the case of M/s Larsen & Toubro (supra).
2) SERVICE TAX ACT
That Service Tax is applicable to Works Contract as “Works Contract”, whereas in the case of sale of Flats, Service Tax was not applicable as per the circular issued by the Union Government. But, now as per the Finance Bill 2010, the Central Government has declared it as “deemed service” to levy Service Tax on sale of flats, etc. That means that the Central Government has declared Sale of Flats etc, by builder as deemed service because the same does not come under the purview of “Works Contract”.
That, a Circular No. 334 /1/2010 – TRU dated 26th February 2010 was presented in the Parliament before imposing Service Tax on advances received by Builders as “Deemed Service”.
In Annexure, Serial No. 8, it has been clearly mentioned that there are two types of transaction of Sale of Flats etc., which are done in the country:
a) Development, Construction & Tripartite Agreement (as was done in the M/s. K. Raheja and M/s Larsen & Toubro case in Karnataka)
b) Sale Agreement (as being done in general cases in Jharkhand as per the Jharkhand Apartment (Flat) Ownership Act)
That, it may be noted from the above circular that the two (2) types of transactions are being done in the State of Karnataka and in the State of Jharkhand are absolutely different and the same can not be judged to be similar for Tax Purposes.
3) REGISTRATION AS PER JHARKHAND APARTMENT ACT 2011
That, as per the Jharkhand Apartment (Flat) Ownership Act, 2011, the point 19(1) of the act states that, whenever any sale of Flat is made, the Sale Deed in favor of the buyer has to be compulsorily done within 3 months from the date of such sale after paying the requisite Stamp Duty and registration fee to the State Government.
That, after completion of the work, in a Works Contract, No registration of Sale Deed is required to be done. In fact, in works contract, the contractee is already the owner. The property in the goods is passed as soon as the goods are consumed during the process of execution of works contract and thus no stamp paper or registration fee is required to be paid to the government. Whereas, in general cases in Jharkhand as pure builder, the right, title and interest in the Flat being immovable property gets transferred onto the buyer only by registering the sale deed at the registry office after payment of Full Stamp duty and registration fee to the State Government of Jharkhand.
That, under Works Contract, VAT is made applicable as the state does not get any revenue in the form of stamp paper and registration fees whereas, for the sale of Flats being immovable property, the purchaser already pays stamp paper and registration fees to the tune of 7% of full sale value of the flat sold, therefore the legislature has not made the VAT applicable to sale of flats.
That, in the case of works contract, The Jharkhand Apartment (Flat) Ownership Act 2011, Transfer of Property Act 1882, Indian Registration Act, Indian Stamp Act etc., is not applicable. The above acts, i.e, The Jharkhand Apartment (Flat) Ownership Act 2011, Transfer of Property Act, Indian Registration Act, Indian Stamp Act etc., are applicable only for the Sale of Flat.
That, Works Contract has been kept under the purview of “VAT” for the sake of revenue generation for state, as registration revenue is not being generated. In general cases in Jharkhand, sale of flats being immovable property have been kept by the state outside the purview of VAT with full knowledge of stamp paper and registration fees being borne by the buyer and the state getting the revenue through registration department.
That, The Sale of Flat under the Sale Agreement is completed by delivery of the Flat etc., chattel as a Chattel and the Sale Deed is executed in respect of the Flat considering it as Immovable Property. The Government of Jharkhand has considered the Sale of Flat as Immovable Property and has been charging 4% Stamp Duty and 3% Registration Expenses, totaling 7% on Full Value of the Flat, therefore the same state government through its another department can not consider Sale of Immovable Property to be Works Contract.
4) OWNERSHIP OF LAND
That, in a Works Contract the LAND does not belong to the Contractor. In both the case of M/s K. Raheja Development Corporation and M/s Larsen & Toubro Limited, they were not the Owners of the Land, but they were only developing on the Owner’s Land by entering into development agreements with the Owners of the Land.
That, in general cases in Jharkhand, the Builder is the Owner of the Land and the Land has been purchased by the Builder through registered Sale Deeds after paying the requisite Stamp Duty and Registration Expenses to the Government. The Builder is not entering into any kind of development agreement with any person only the Sale Agreement is executed with the buyer.
That, in the case of Works Contract, the Work is started by the Contractor after getting Work Order. The Works contract is executed before starting the Work. In general cases in Jharkhand, as may be observed, that the Work is started by the Builder (who is also the owner of the land) at its own desire and continues the work irrespective of any allotment or agreement for sale done or not. The Agreement for Sale of flat etc., (Immovable Property) is executed at any time before handing over and not necessarily before start of work.
That, in the present case, the Builder pays the rent on land to the State Government in its own name and on its own behalf, because the builder is the owner of the land and continues to pay rent and remain the owner till the Flat (immovable property) gets transferred and handed over to the Purchaser. In a Works Contract, the Contractee does not pay the rent on land as they are not the owners of the land.
5) ADVANCES RECEIVED FROM BUYERS DO NOT CHANGE THE NATURE OF TRANSACTION
That, payments during the execution of the works contract are against the property in goods transferred in form of consumption of goods at the contractee owned land.
That,in general cases in Jharkhand, payments made as advances for purchasing the flat are nothing but part of sale consideration received in advance. If only payment received before delivery of goods or flat (immovable property) are considered to be sufficient proof to make it works contract, then all the sale of Moveable goods also, where advance payments are made before manufacturing the same will also be works contract, like steel, cement, building materials, pumps, cars, vehicles, trucks, furniture, machineries, T.V, Fridge, Calculator, Watch, Pen, Pencil etc., (almost all goods which are yet to be produced or manufactured or assembled). Simply taking advances from the buyers against sale of flat or any other goods does not change the nature of transaction from such Sale to Works Contract.
That, as per the Jharkhand Value Added Tax Act 2005, there is NO provision in the Act to treat a “Sale” as “Works Contract” if advance payments are taken from the buyer against the sale of flats.
Further, No notification has been issued by the Government of Jharkhand imposing VAT on Sale of Flats as has been done in some other States, where they have different Apartment Acts.
6) RISK OF NATURAL CALAMITIES LIES WITH THE BUILDER
That, in the case of natural calamities like earthquake etc, the contractor does not suffer the loss, whereas, in general cases in Jharkhand of pure builder, in case of natural calamities and risks, the builder has to suffer the losses.
7) THERE CANNOT BE DOUBLE TAXATION ON SAME TRANSACTION
That, VAT cannot be charged on Sale of Flat because the law makers are fully aware of the fact that the buyer is already contributing to the Government revenue in the form of Stamp Paper and Registration Expenses. There cannot be double taxation on the same transaction.
That, even the Hon’ble Supreme Court of India in the case of M/s Larsen & Toubro (supra) stated that the facts of the case are most relevant to stipulate whether it’s a “Works contract” or a “ Pure Sale”.
That, If Sale of Flat by the builder where NO third Party is present (which is a pre-requisite for being considered as a Works Contract, as per the view of the Hon’ble Supreme Court of India in the case of M/s Larsen & Toubro (supra)) is considered to be Works Contract, then Registration of Flat at full value should not be required to be done, as the property in goods (like cement, steel etc.) has already passed on to the buyer as per Works Contract. But, in Jharkhand this transaction of Sale is being considered as Sale of Immovable Property and that the Jharkhand Apartment Act 2011 requires the same to be registered within 3 (three) months from the date of possession at full value.
Therefore, the general cases of sale of flats are pure Sale and it is not Works contract in view of the above.
sir,can builder demand sale tax on flat
Consideration received wholly or partially before completion certificate is considered as a service and therefore taxable. The Finance Act, 1994 is applicable on whole of India except Jammu and Kashmir.
Dear Shri Manoj B. Shah,
I thank you for your comments. I would like to put forward some facts before you:
In the case of M/s Larsen & Toubro, the Hon’ble Supreme Court of India stated in Point no. 107(iii) that “Even an Owner of the property may be said to carrying on a works contract…” Please note the Words “MAY”. It only specifies May or May Not (depending on the situation)
Here the Hon’ble Court is stating this fact while considering the case of M/s Raheja Development where there were 3 parties present. The Owner of the Land, The Developer and the Purchaser.
The Hon’ble Supreme Court is talking about the “OWNERS” of the Land who enter into “JOINT DEVELOPMENT” Agreements with the Developer in some ratio. For eg. The Owner of the Land enters into a Joint Development Agreement with a Developer to develop the Land in the ratio of 40:60 (40 percent of Owner and 60 percent of Developer).
Now, if the Owner sells his part of the share (40 percent) of the Flat etc., to other Purchasers, then the Hon’ble Supreme Court has viewed it to fall under “WORKS CONTRACT”
The Hon’ble Supreme Court has NOT observed the same in a Case, where the Developer is the 100% Owner of the land and then only “Agreement to Sell” is Executed with the Purchasers and NO Development Agreement, Construction Agreement or Tripartite Agreement is Entered
As per the point 101(i) of M/s L&T case (supra), the Hon’ble Supreme Court has said that to fall under the Works Contract Category “3 Parties is a MUST”.
Please Note the difference between “MUST” and “MAY”
Also, to further brief you:
As per the Government’s Circular No. 334/1/2010 – TRU dated 26th February 2010 which was circulated in the Parliament, you will observe that the Government has differentiated between the two types of transactions done in India. By differentiating, the primary motive of the Government was to “achieve the legislative intent and bring parity in tax treatment”.
The same differentiating between the 2 Types of Transactions was done in the case of MCHI vs. UOI (W.P. 1456 of 2010) at the High Court of Bombay where in Point No. 19, the Hon’ble High Court has observed that there are differences between “Agreement to Sell” and “Sale of Undivided Portion of the Land”
In States Like Maharasthra & Karnataka, “Sale of Undivided Portion of the Land” is executed, which is a Device adopted to reduce the incidence of Stamp Duty since the Vacant Land in which an Undivided Intrerest was created would have a Lower Value.
While in States like “Jharkhand, West Bengal, Orissa etc” “Agreement to Sell” is executed where the Flat Purchasers pay FULL AND APPROPRIATE STAMP DUTY.
But, by an explanation to Section Section 65(105)(zzzh) inserted in the Finance Bill 2010 the Government has levied Service Tax on both the two types of transactions.
This was NOT THE MOTIVE OF THE GOVERNMENT. The Explanation has to be Modified Suitably. If the INTENTION of the Government was to Levy Service Tax on All Types of Transactions, then What was the Need to differentiate between the Two Types of Transactions ?
The Central Government under Service Tax Act has Not considered the Sale of Flats as “Works Contract”. Had the Central Government considered it to be Works Contract then there was NO need to make it “Deemed Service” (w.e.f. 01/07/2010) or “Declared Service” (w.e.f. 01.07.2012), which you may please check.
Dear shri Agrawal,
As far as ‘VAT’ liability is considered I do not offer any comment as I am not well conversant with ‘VAT’ law in the state of Jharkhand.
As far as ‘SERVICE TAX’ is considered, I draw your kind attention to para no. 105 of M/S L & T judgement of HONOUARBLE SC, wherein the court has specificaly stated that even if builder/developer is the owner of land and constructing reisdential/commercial units, and during construction, booked the flat/office then also it will be considered as ‘works contract. Further in service tax w.e.f. 01-07-2012, under nagative regime of taxation, ‘DECLARED SERVICE’ concept is introduced. ‘CIVIL CO NSTRUCTION’ and ‘WORKS CONTRACT’ service are ‘DECLARED SERVICE’. Further effective 01-07-2010, an explantion is introduced that if during construction, booking/advance is taken then it will be under service tax. The referrence of Fbruary is no longer effective after 01-07-2010. This write up is only for better understanding and to know your view, if possible.