V Swaminathan B.Sc., B.L., FCA

PROLOGUE

This is intended to serve the purpose of a Supplement to the earlier write-up displayed @

https://taxguru.in/service-tax/deeming-a-legal-fiction-service-tax-a-case-study.html

And, therefore, needs to be read and understood accordingly, for an appreciation of the thoughts and viewpoints shared, in proper light. The propositions as stated and canvassed for in the earlier write-up, to recap, may be summed up as under:

(A) Levy of VAT and Service tax in dispute are highly contestable as ultra vires the constitution, on more than one ground.

(B) There is no rhyme or reason, or rationale,  in deeming the subject property, – ‘Flat’ (inclusive of the inseparable / appurtenant UDI) to be NOT an ‘immovable property’; for , doing so, apparently  flies in the teeth of its having to be, and hence being, otherwise regarded as an immovable property for other taxation purposes, such as income-tax , stamp duty and property tax.  Further, that runs counter to the otherwise well accepted and firmly established /settled legal position according to the/under all other inter-related (-connected) laws (mainly, the time tested, age-old TP Act)

(C) The legality or legitimacy of the ‘deeming provisions’ (of relevance herein) is highly questionable, if were to be tested, as warranted, using the nature-given faculty of  common sense, and  by applying  inter alia the most dominant of all namely, the principles of natural justice.

(D) In the HC Judgment, as clearly borne out by, among others,  Paragraphs 4 and 5 therein, the SC’s  opinion as handed down in its judgment of 2005, in K Raheja’s case, in Revenue’s favour , has, not having been pressed for a re-look at or review, not been gone into afresh. Hence, to say that the vires of the deeming provisions stands conclusively conceded or finally upheld, much less concluded once for all,   is patently absurd. On the contrary, the SC judgment of 2015, Commnr.,Central Excise & … vs M/S. Larsen & Toubro , it could be validly urged, with all force, to have finally clinched the issue (s), in taxpayers’ favour.

2. The relevant observations of the SC In the judgment of 2015, in Commnr.,Central Excise & … vs M/S. Larsen & Toubro , calling for a special noting, are quoted below:

It all began with State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., 1959 SCR 379. A Constitution Bench of this Court held that in a building contract which was one and entirely indivisible, there was no sale of goods and it was not within the competence of the State Provincial Legislature to impose a tax on the supply of materials used in such a contract, treating it as a sale. THE ABOVE STATEMENT WAS FOUNDED ON THE PREMISE THAT A WORKS CONTRACT IS A COMPOSITE CONTRACT WHICH IS INSEPARABLE AND INDIVISIBLE, AND WHICH CONSISTS OF SEVERAL ELEMENTS WHICH INCLUDE NOT ONLY A TRANSFER OF PROPERTY IN GOODS BUT LABOUR AND SERVICE ELEMENTS AS WELL. (PARA 2)

We need only state that in view of our finding that the said Finance Act lays down no charge or machinery to levy and assess service tax on indivisible composite works contracts, such argument must fail. THIS IS ALSO FOR THE SIMPLE REASON THAT THERE IS NO SUBTERFUGE IN ENTERING INTO COMPOSITE WORKS CONTRACTS CONTAINING ELEMENTS BOTH OF TRANSFER OF PROPERTY IN GOODS AS WELL AS LABOUR AND SERVICES. (PARA 43)

We have been informed by counsel for the revenue that several exemption notifications have been granted qua service tax “levied” by the 1994 Finance Act. WE MAY ONLY STATE THAT WHICHEVER JUDGMENTS WHICH ARE IN APPEAL BEFORE US AND HAVE REFERRED TO AND DEALT WITH SUCH NOTIFICATIONS WILL HAVE TO BE DISREGARDED. SINCE THE LEVY ITSELF OF SERVICE TAX HAS BEEN FOUND TO BE NON-EXISTENT, no question of any exemption would arise. With these observations, these appeals are disposed of. (PARA 44)

We, therefore, allow all the appeals of the assessees before us and dismiss all the appeals of the revenue.  (PARA 45)

It is thus seen, and as is more than obvious, in Bansals’ case, the HC Judgment has simply reiterated and followed the opinion of the SC already handed down, constituting the PRECEDENT. As such, the view sought to be projected in certain circles, learned / eminent, or otherwise, -in one’s firm view wrongly so,- to the effect that there is still any scope left for the Revenue to successfully pursue and contest the HC Judgment in further proceedings, in one’s firm conviction, is prima facie misconceived, being bereft of any logic.

3. Even so, in all fairness, it might not be prudent to ignore but to have a re-look at the SC Judgment of 2005 @ M/S K. Raheja Development … vs State Of Karnataka on 5 May, 2005 (https://indiankanoon.org/doc/1319816/)

For the discussion herein, with a limited purpose in mind, it should suffice to take a note of the relevant observations in PARAGRAPH  4 (i) of that Judgment:

Mr. Mehta submitted that by virtue of the Agreement entered into by the Appellants with the owner of the property the Appellants became owners of the property even though a formal conveyance in their favour had not been executed. He took this Court through various provisions of the Agreement entered into by the Appellants with the owner of the property. He submitted that under such Agreements almost the entire consideration amount is paid to the owners and possession of the property is handed over to the Appellants. He submitted that by virtue of the principles laid down in Section 53A of the Transfer of Property Act the Appellants were the owners of the property. In support of this submission, he relied upon the Judgments of this Court in the cases of C.I.T. vs. Podar Cement Ltd. reported in (1992) 5 SCC 482 and Mysore Minerals Ltd. vs. C.I.T. reported in (1999) 7 SCC 106. IN THESE CASES, IN THE CONTEXT OF THE INCOME TAX ACT, IT HAS BEEN HELD THAT EVEN THOUGH THERE IS NO FORMAL CONVEYANCE THE CONCERNED PARTY COULD BE CONSIDERED TO BE THE BENEFICIAL OWNER. MR. MEHTA SUBMITTED THAT AN OWNER CANNOT BE SAID TO CARRYING ON A WORKS CONTRACT ON BEHALF OF OTHERS. Mr. Mehta next submitted that in any event the Appellants did not undertake any works contract for and on behalf of the intended purchasers. He submitted that the Appellants were themselves developing the property and selling flats or commercial complexes in that property. He submitted that in such type of activities no works contract was involved. Mr. Mehta submitted that in the Agreements with the intended purchasers there was a clause which provides that if all payments are not made then amounts paid can be forfeited and the agreement rescinded. He submitted that a person carrying out a works contract would have no right to forfeit or rescind the contract itself. He submitted that such a clause indicates that the Agreements are not agreements to carry out a works contract. On the other hand, Mr. Hegde submitted that the definition of a `works contract’ in the said Act is an inclusive definition which is very wide. He submitted that any agreement wherein party has agreed to construct or build for cash, deferred payment or other valuable consideration would be covered by the definition of the term `works contract’ as used in the said Act. In support of his submission he relied upon the Agreements entered into by the Appellants with the various purchasers and submitted that these Agreements indicate that the Appellants are undertaking the construction of the building and the flats for and on behalf of the purchasers and that the same is for valuable consideration to be paid in a differed manner. He submitted that except to the extent that the Appellants retain certain commercial premises or flats for themselves, the work carried out pursuant to such Agreements would amount to a `works contract’. He submitted that the Appellants are liable to pay turnover tax on the transfer of property in goods involved in such works contract. We have heard the parties, perused the various documents and considered the cases cited at the bar. As has been rightly submitted by Mr. Hegde the definition of the term `works contract’ in the said Act is an inclusive definition. It does not include merely a works contract as normally understood. 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 definition does not make a distinction based on who carries on the construction activity. Thus even an owner of the property may also be said to be carrying on a works contract if he enters into an agreement to construct for cash, deferred payment or other valuable consideration. We, therefore, do not need to go into the question whether the Appellants are owners as even if the Appellants are owners to the extent that they have entered into Agreements to carry out construction activity on behalf of somebody else for cash, deferred payment or other valuable consideration, they would be carrying out a works contract and would become liable to pay turnover tax on the transfer of property in the goods involved in such works contract. Further under the said Act there is no distinction between construction of residential flats or commercial units. Thus, a works contract, within the meaning of the term in the said Act, can also be for construction of commercial units. FOR THE PURPOSES OF CONSIDERING WHETHER AN AGREEMENT AMOUNTS TO A WORKS CONTRACT OR NOT, THE PROVISIONS OF THE KARNATAKA OWNERSHIP FLATS (REGULATION OF PROMOTION OF CONSTRUCTION, SALES, MANAGEMENT AND TRANSFER) ACT, 1974 WILL HAVE NO RELEVANCE. HOWEVER AS MR. MEHTA HAS ARGUED ON THIS ASPECT WE RECORD THAT RELIANCE OF THE JUDGMENTS IN PODAR CEMENT LTD. AND MYSORE MINERALS LTD. CASES (SUPRA) ARE OF NO ASSISTANCE TO THE APPELLANTS. THOSE ARE CASES UNDER THE INCOME TAX ACT. THOSE CASES LAY DOWN THAT THE TERM `OWNER’ MUST BE GIVEN AN INTERPRETATION IN THE CONTEXT OF THE PROVISIONS OF THE ACT. IF THAT RATIONAL WAS TO BE APPLIED THEN IN THE CONTEXT OF THE KARNATAKA SALES TAX ACT, THE APPELLANTS WOULD NOT BE OWNERS AS ADMITTEDLY THEY DO NOT HAVE ANY REGISTERED SALE-DEEDS IN THEIR HAND. THE AGREEMENT RELIED UPON BY MR. MEHTA BETWEEN THE APPELLANTS AND THE OWNERS OF THE LAND IS NOTHING BUT A DEVELOPMENT AGREEMENT. PURSUANT TO SUCH AN AGREEMENT, PLAN WOULD BE GET SANCTIONED IN THE NAME OF THE OWNER OF THE PROPERTY. IT WOULD BE THE OWNER OF THE PROPERTY WHO WOULD THEN EXECUTE A CONVEYANCE DIRECTLY TO THE SOCIETY OF PURCHASERS. ALL THAT THE APPELLANTS HAVE IS A POSSESSORY INTEREST AND A RIGHT TO CONSTRUCT. SUCH RIGHTS DO NOT CONSTITUTE THE PERSON AN OWNER OF THE PROPERTY. To consider whether the Appellants are executing works contract one needs to look at a typical Agreement entered into with the purchaser. The relevant clauses are clause (q), (r) of the recitals and clauses 1, 5(c) and 7, which read as follows: “q) i) Construction of the said multi-storeyed building;

ii) Sale of the units in the aforesaid multi-storeyed building to different persons in whose favour ultimately a Deed of Conveyance would be obtained by the Holders, directly from the Vendors, of an undivided fractional interest in the said land (i.e. the area of 5910.17 sq. metres described in the First Schedule hereunder written) and such owner of units would own, on ownership basis, the respective units on condition that an Agreement would be entered into between the Holders on the one hand and the persons (desiring to acquire on ownership basis an unit in such multi-storeyed building) on the other hand and it would be an essential, integral and basic concept, term and condition of the proposed transaction (which would be by way of a package deal not capable of being segregated or separated or terminated one without the corresponding effect on the other) that K. RAHEJA DEVELOPMENT CORPORATION AS THE LAND-HOLDER WOULD AGREE TO SELL TO SUCH PERSONS AN UNDIVIDED FRACTIONAL INTEREST IN THE SAID LAND DESCRIBED IN THE FIRST SCHEDULE HEREUNDER WRITTEN ON CONDITION THAT THEY I.E. M/S K. RAHEJA DEVELOPMENT CORPORATION AS DEVELOPERS ON BEHALF OF AND AS DEVELOPERS OF SUCH PERSON WOULD CONSTRUCT FOR, AS A UNIT ULTIMATELY TO BELONG TO SUCH PERSON A UNIT OR UNITS THAT WOULD BE SO MUTUALLY SELECTED AND SETTLED BY AND BETWEEN K. RAHEJA DEVELOPMENT CORPORATION AND THE PERSON CONCERNED; …..

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It is thus seen that the SC Judgment has been delivered having  regard to the peculiar factual matrix of that case; in that, the transaction was covered in two agreements,- one for sale of UDI in land, and another for construction undertaken by the builder. Albeit, according to, and as is more than obvious from, the scheme of the provisions embodied in the special state law governing ‘Apartments’, the transaction ought to have been, as mandated, obligingly covered in a single agreement, for sale and purchase of apartments. In other words, the gimmick of twin agreements, as admittedly resorted to only for saving on stamp duty on the separate construction agreement is indisputably in breach of the scheme of requirements as mandated by the applicable above referred state law governing Flats (or Apartments); and as such, in any view, the SC Judgment of 2005 cannot, by any reasoning or stretch of imagination, be rightly regarded to hold good, or to have any relevance or application, in general. 

Aside: For an elaboration in detail of this aspect, there is a plethora of useful material shared through and available for the asking, in public domain. Besides, even in the HC Judgment (in Bansals’ case), there is some  reference to such type of agreement in vogue- simply mentioned but glossed over , not gone into in-depth –  as  one of the three types commonly adopted by builders, in practice (refer Paragraph  of    that judgment) 

Also, the below mentioned aspects are required to be kept in sharp focus:

The portion of the Judgment, having been highlighted herein before, but calling for a conscious note of, is, at the cost of repetition though, again reproduced (-

“FOR THE PURPOSES OF CONSIDERING WHETHER AN AGREEMENT AMOUNTS TO A WORKS CONTRACT OR NOT, THE PROVISIONS OF THE KARNATAKA OWNERSHIP FLATS (REGULATION OF PROMOTION OF CONSTRUCTION, SALES, MANAGEMENT AND TRANSFER) ACT, 1974 WILL HAVE NO RELEVANCE. HOWEVER AS MR. MEHTA HAS ARGUED ON THIS ASPECT WE RECORD THAT RELIANCE OF THE JUDGMENTS IN PODAR CEMENT LTD. AND MYSORE MINERALS LTD. CASES (SUPRA) ARE OF NO ASSISTANCE TO THE APPELLANTS. THOSE ARE CASES UNDER THE INCOME TAX ACT. THOSE CASES LAY DOWN THAT THE TERM `OWNER’ MUST BE GIVEN AN INTERPRETATION IN THE CONTEXT OF THE PROVISIONS OF THE ACT. IF THAT RATIONAL WAS TO BE APPLIED THEN IN THE CONTEXT OF THE KARNATAKA SALES TAX ACT, THE APPELLANTS WOULD NOT BE OWNERS AS ADMITTEDLY THEY DO NOT HAVE ANY REGISTERED SALE-DEEDS IN THEIR HAND. THE AGREEMENT RELIED UPON BY MR. MEHTA BETWEEN THE APPELLANTS AND THE OWNERS OF THE LAND IS NOTHING BUT A DEVELOPMENT AGREEMENT. PURSUANT TO SUCH AN AGREEMENT, PLAN WOULD BE GET SANCTIONED IN THE NAME OF THE OWNER OF THE PROPERTY. IT WOULD BE THE OWNER OF THE PROPERTY WHO WOULD THEN EXECUTE A CONVEYANCE DIRECTLY TO THE SOCIETY OF PURCHASERS. ALL THAT THE APPELLANTS HAVE IS A POSSESSORY INTEREST AND A RIGHT TO CONSTRUCT. SUCH RIGHTS DO NOT CONSTITUTE THE PERSON AN OWNER OF THE PROPERTY.”

Simply on a reading of the foregoing text of the Judgment, it would not have been possible for anyone, not barring men of learning / eminence, to clearly make out and emphatically say as to what precisely were the arguments actually advanced or the propositions sought to be canvassed. Be that as it  may, one thing seems to be  more than obvious; that is, should the provisions of the special state enactment, so also the relevant observations of the SC in Podar Cement Ltd.’s case  be looked through and duly taken into consideration, the property , being a ‘unit’ of an apartment building  cannot but only be regarded as an ‘immovable property’ within its legal meaning; and especially, within the meaning of the special state enactment (commonly known, in brief,  as ‘KAOA’). If done so, what should have been stoutly urged is that, the concept of ‘works contract’, introduced through ‘deeming provisions’, solely with a view to enabling / empowering the government(s) to levy VAT (or Service tax) , by violently splitting / dissecting the otherwise composite property- known for long as ‘immovable property’ , as conceptualized in legal parlance,  into its components – goods and services , otherwise indivisible and inseparable,- is misconceived; hence ultra vires the constitution.

To add, what calls for underlining, in BOLD is that, what has been agreed to by parties, for valuable consideration, and is to be sold /purchased, is the FLAT, inclusive of an ‘undivided- interest’ (UDI) in, not the entire land on which the multi-storied building is constructed; and that explains why the whole of the  land,  as per the statutory definition under the special state law (see section 3 (f)  of KAOA), is included in ‘common areas and facilities’, not partitionable, meant for purchasers as a body to use in common, not individually or  separately by any one ore more of them.

Aside: For an analysis / elaboration of this crucial aspect, of every relevance herein, it is a must , hence recommended to go through , without fail, the study of the SC Judgment* as covered in extenso in the published article on ‘Nahalchand’s case’ – citation : 2014 (3) Kar. LJ., pg. 1 to 26.    

(* Report @ Nahalchand Laloochand P.Ltd vs Panchali Co-Op … – Indian Kanoon

https://indiankanoon.org/doc/1405290/)

KEY NOTE:

Should one go only by the counsel’s arguments summed up as above, court’s specific attention does not seem to have been drawn to certain features /provisions of the special law itself; that is , those are as covered in the two enactments (called, in short, KOFA -to be read with – KAOA).  

For instance, – in the “STATEMENT OF OBJECTS AND REASONS” set out in the Preamble (opening part of) KOFA itself , it is unequivocally stated /made quite clear that separate law (obvious reference is to KAOA, so separately enacted)   “is being made to declare that  flats or apartments in multistoried building may, for all purposes, be heritable and transferable “IMMOVABLE  PROPERTY.”

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  • Aside: It calls for a pointed mention that, by necessary implication, conceptually, rather indisputably, the property (rights and interests) in Flat /Apartment could not but be regarded to be ‘immovable property’, in any sense; but such a specific declaration was considered necessary and hence came to be inserted, only in order to make  the property ‘heritable and transferable’. In other words, without such a declaration, the property would not have been heritable or transferable.   

In retrospect, is it not sad, nay a matter of deep regret, that,- had the propositions been suitably framed and addressed to court (s), and stressed forcefully, the whole of the ongoing controversy, kept alive, in one’s conviction impudently so, for years, would not have been prolonged but could have been nipped in the bud, with the issue of constitutional vires having been straight away adjudicated upon  in favour of the ‘assessees’ at an early stage ! 

Tail NOTE:

For one more aspect, earlier intended to be covered but left out for now, concerns the requirement of “CC” /  ”OC” specified in the ‘deeming provisions’ to be sine qua non for levy of Service tax (so also, for VAT !).

In one’s long standing conviction, based on well considered reasons, anyone who has ever cared to insight fully study and incisively understand the deep implications of the governing spl. state law cannot but have reached the only possible conclusion:  The legislative wisdom in so specifying CC or OC (for that matter, also ‘occupation’ / ‘possession’ as specified in GST Code) as the sine qua non for the levy (ies) is, to say the least, patently questionable; and, if appropriately addressed, may not stand the rigid tests of  judicial adjudication.

For the time being, if anyone were interested, may, however, look up the related brief comment posted on Facebook. 

EPILOGUE

In the earlier write-up, it has been pinpointed to the effect that, the subject matter being ‘Flat’ shall have to be regarded nothing other than ‘immovable property’; which is the premise on which, the treatment is given for the other taxation purposes, – income-tax, wealth tax, and property tax.

To briefly add: The proposition that a Flat could conceivably be regarded to be nothing but an immovable property should find ample support, also from an analytical study and incisive understanding of the other statutory provisions; for instance, -Section 80 IB, Section 194 IA, so on.

CONCLUSION:

If critically analyzed, it is a simple common sense approach, and an honest , unbiased appreciation of the basic fact that is called for. That is, not only in form but also in substance; for, , there could be no denying that what the parties have agreed to is sale and purchase of the constructed property (Flat/Apartment), and after its completion; NOT OF the ‘goods’ or ‘services’ (being the input by builder) anytime before such completion.

  • Aside: As is said,- ‘to call a spade a spade’ basically needs courage of conviction; but for doing so, the caller must necessarily know, or have the sense to identify, first of all, what or which one is, or is not, spade.         

<>The vital and fundamental  issue involved requiring special focus is the  validity , legality and legitimacy, and / or ‘morality’  of the amendments of the constitution, to pave the way for the governments to impose the subject levies of VAT and Service tax. It might be worthwhile to have a close study and appreciation of the well-considered opinion of the renowned legal legend / the law expert , par excellence – n a palkhivala – as expressed, time and again, in his annual fiscal budget and other public speeches on the propriety or otherwise of such amendments periodically made in the past. The published memorable versions thereof are contained in the special chapters, in the two popular books- WE, THE PEOPLE (PART III) & We, the Nation ( 10. Other Constitutional Issues); a must read.

Recommend strongly, for an independent study and forming, before sharing, a well-considered opinion, to spare no pains but mindfully go through, for immensely useful clues and proper guidance, inter alia, also the following:

Write-ups based on a critical study of the Case Law on closely related / interconnected Topics, in public domain.

Cross Refer:

LAW and (‘vs’?) CASE LAW On “FLATS” – A … – TaxGuru

LAW vs Case Law (A Critique) – A study of SC Judgment … – TaxGuru

It may not be early, – if at all could be late, – for one and all concerned to wake, sit up and realize that the fall -out problems subsequently faced with, are, perhaps, traceable to the line of reasoning, the stance taken and pressed for on behalf of the Revenue in Podar Cement Ltd.’ s case; and by far accepted and adopted in the SC Judgment. As analyzed in the write-up (critique), the tax issue could have been decided , although again in Revenue’s favor, but for a better / sound reasoning and on well -founded grounds, had the apex court been persuaded to decide after taking a conscious note of and having recorded  the true implications of the special state law governing ‘Flats’ (MOFA &MAOA) in force.     

  • Over to eminent Experts to form and share their independent opinion, also on this viewpoint as reiterated above.

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