: LIABILITY OF BUILDING CONTRACT UNDER THE GUJARAT VAT ACT, 2003 :

By - Hasmukh Soni B.Com. LL.B Tax Consultant ------------------------------------------------------------------------------------------------------------

„ Contract for construction of Building : Building construction is a civil work. Provisions of works contract applies to contract for construction of buildings. In building construction industry normally following systems are followed; 1. Builder/Organizer purchase the land, purchases material for use in construction of building (shops, apartments etc), after completion of building sales immovable property. 2. Builder/Organizer purchase the land, enters into agreement with contractor for development, contractor use his material and labour for construction of building, builder allot/sales constructed building to purchaser. 3. Builder/Organizer purchase the land, enters into agreement with contractor for development, supplies material to contractor for use in works contract, contractor employs labour for construction of building, builder allot/sales constructed building to purchaser. 4. Builder/Organizer purchase the land, float scheme, books members by receiving booking amount/installments, allot constructed building to members. Whether builder/building contractor is liable under Gujarat VAT Act, 2003? if yes, to what extent? This question is always disputed and debatable. Following judgments help us to under stand this issue in nut shell : 1. K Raheja Development Corporation V/s State of Karnataka, ( 2005 141 STC 298 S.C.). 2. Assotech Reality Pvt Ltd v/s State of U.P. (2007 8 VST 738 U.P. H.C.) 3. Larson and Toubro Ltd. V/s. State of Karnataka (2008 17 VST 460 S.C.)

1.

Regarding liability of builders, Supreme Court has given decision in the case of K. Raheja Development Corporation V/s State of Karnataka, [(2005) 141 STC 298 (S.C.)]. Ratio of the judgment is as under :The Hon’ble Supreme court has held that, ‘works contract’ has an inclusive definition which includes any agreement for carrying out building for construction activity for cash, deferred payment or other valuable consideration - hence appellants are owner 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.

2.

Decision of Supreme Court in K. Raheja case came up for the consideration before the Allahbad High Court in the case of Assotech Reality Pvt Ltd v/s State of U.P. (2007 8 VST 738). So far as this decision is concerned it is of course true that Allahabad High Court has distinguished the ratio of K. Raheja case (supra) of the SC on the basis of peculiar facts of the agreement between the parties which came up for consideration before the High Court. However, R.K. Agrawal justice fix for the Division bench in the said decision has referred to the definition into the definition of “Works Contract” of the UP Act which is reproduced in para 15 of the report. The said definition of ‘works contract’ in UP Act is found in section 2 (m) of the said Act. The said definition reads as under: “works contract includes any agreement for carrying out for cash, deferred payment or other valuable considerations, the building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.” “Now, a mere look on the said definition shows that the U.P. Act has also enacted a similar comprehensive definition of “works contract” as was found in the Karnataka Act which resulted in decision in K. Raheja case (supra). However, despite that definition, the Division bench of the Allahabad High Court distinguished Raheja case (Supra) of the SC in light of various clauses 3, 8, 19,20 and 27 of the agreement between the parties. The High Court has taken the view that decision in Raheja case (Supra) would not be applicable to the facts before them and consequently the transaction in question cannot be treated as works contract. However, the said decision of

the Allahabad HC at page 97 has laid down that “from a conjoint reading of clause (m) of Section 2 and Sec. 3F of the Act, it is seen that to be a works contract under the Act the activities mentioned therein ought to have been undertaken by means of an Agreement, either implied or written, for cash, deferred payment or other valuable considerations.” It was further observed that “if the activity is being undertaken by person or himself than it would not be works contract under the Act and consequently there will be no liability for payment of tax under section 3F of the Act.” In our view, the aforesaid observations at page 97 may appear to be taking contrary view as compared to the decision of the SC in K. Raheja case (Supra), as noted earlier the SC has clearly laid down that it’s a wide definition which includes ‘any agreement for carrying out building or construction activity for cash, default payment or other valuable considerations. Thus even an owner of the property may also be said to be carrying on a work contract however it may be seen that special clauses of contract before the Allahabad HC have been relied upon for holding in favour of the assessee. It was held in Para 21 that on reading of the aforesaid clauses, it was found that transaction was not a works contract to be covered by the network of UP Act. In our opinion apart from the aforesaid fact the division bench’s view of the Allahabad HC also can be treated as proceeding on its own facts in the light of relevant clauses of the Agreement consider by the Division Bench however the decision of the SC in K. Raheja case (Supra) cannot be pressed in service for deciding the moot question of works contract as per Act, 2003 and the rules in the light of the Constitution Scheme regarding correct connotation of the word ‘works contract’ as interpreted and understood by the three constitution bench judgment of the SC and on this ground alone the aforesaid decision in K. Raheja case (Supra) cannot be effectively pressed in service for bringing charge under the Act, 2003.” 3.

In Larson and Toubro Ltd. V/s. State of Karnataka decided on August 19, 2008 reported in ( 2008 17 VST 460 S.C.) the question therein was whether the appellant which was engaged in property development involving construction and building of flats and subsequent sale of complete flats would be liable to pay tax under the KST Act, 1957. The facts were appellant had agreed to develop the plot own by one person. There were two agreements the Developments agreements and the Tripartite agreement between the owner of the plot, the developer i.e. appellant and the prospective buyer of the flat the respondent relied on the decision of K. Raheja case reported in 141 STC 298 SC; AIR 2005 SC 2350 and took the

position that appellant had constructed the flat on behalf of prospective buyers. According to them it was not the development agreement but the tripartite agreement that was the works contract. The Court observed the distinction between two kind of contract sale and works contract which rest on the principle that a contract of sale is one whose object is transfer of property in and delivery of passion of chattel to the buyer, while as the object of the works contract undertaken by the payee for price is not the transfer of chattel as chattel the contract is one of work and labour. The Lordship than referred the matter for reconsideration by larger bench placed it before the Hon’ble Chief justice for appropriate direction as in view of the above decision if the view is accepted than there would be no difference between works contract and chattel to chattel. 4.

with regard to facts for the State of Gujarat, the decision of K. RAHEJA reported in 141 STC 298 SC; AIR 2005 SC 2350 cannot be held as good law as the enforceability has been naturalized by the latter decision in the case of Larson and Toubro Ltd. V/s. State of Karnataka decided on August 19, 2008 reported in (2008) 17 VST 460 SC. Under the construction industries almost all dealings are generally made by single contract wherein the price offered is always per sq. feet or per sq. yard which include the cost of land the prospective buyer of the flat or bungalow or shop never enters into agreement for construction of the property but they have clear only and only intention to buy a desire immovable property they never engage architect, builder, labour, contract or sub-contract nor do they make any payment by bifurcation to any agency by such breakup and keeps books of accounts.

In view of the above it is comprised that : (1)

A builder purchase the land, develop it, construct the residential buildings /business complex, and sale the fully constructed premises to the buyers that would be sale of immovable property, no liability under VAT Act would arise as the sales are of immovable property.

(2) Building, residential house, shop, offices if sale by receiving booking amount and installments from buyer, that would not amounts to agreement for construction of property for buyers. Purchasers have clear and only intention to buy a desire immovable property. And that would be the sale of immovable property. No liability under VAT Act would arise.

(3) A builder, building contractor, organizer is liable to obtain registration if purchase value of materials exceeds Rs.5 Lakh. Purchases made from unregistered dealer would be liable to purchase tax under section 9 of the Act, 2003. (4) Projection of sales could not be determined on the basis of materials used in execution of works contract. Following points are required to be kept in mind, where : „

Goods supplied by the contractee to contractor : 1. If the contractee has supplied material to the contractor for use in the works contract and deducted value from the payment or from final payment, in such case the supply of goods shall be treated as sale and liable to VAT. 2. When the contractor use the goods supplied by the contractee in the execution of works contract and bill it to the contractee, in such a case he is liable to pay VAT on the value of goods transferred to the contractee in the execution of works contract. However the contractor is entitled to claim tax credit 3. The agreement between contractor and contractee and the fact of each case is decisive to determine whether supply of goods by contractee to contractor is to be sale or not.

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Judgments on the issue where goods supplied by the contractee to contractor : 1. In the case of Builders Association of India (88 STC 214 (SC), the Supreme Court held that, in a works contract any goods supplied by the contractee to contractor for execution of works contract, value of such goods cannot be included in the in the taxable turnover of the contractor. 2. Where contractee supplies goods cement steel etc to the contractor for use in the works contract for a fixed price to be recovered or adjusted in the bill of the contractor, such supply is sale of the contractor. [Rashtriya Ispat Nigam Ltd V/s State of A.P [1966 102 STC 454 (A.P.)] vide also [1989 72 STC 368 (SC)] 3. But where the materials are supplied free of cost to be used in the works contract, there will be no sale [ONGC V/s CST U. P. 1996 102 STC 466 (All HC) vide also [1989 75 STC STC 233 (All. HC)]

4. Applying the ratio of 72 STC 368 (SC), the Apex Court (SC) held that, supply of material by contractee to contractor for use in works contract is sale [Cooch Bihar Contractor association V/s State of W.B. [1996 103 STC 477 (SC)] „

Whether main contractor is liable for the goods used/transferred by subcontractor in execution of works contract : It is correct that the goods supplied by the sub-contractor or contractor him self, title in relation thereto passes to the principle only in execution of the main contract is liable to be taxed only once. If the sub-contractor had all ready been assessed, and in the order of assessment passed, the assessing authority had all ready taken into consideration the goods which where supplied in execution of his person of the contract, no further sales tax would be leviable thereupon. [Hindustan Door-Oliver Ltd. V/s Union of India 1989 75 STC 211 (Pat. HC DB)]

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Liability of sub-contractor : In the case of Larsen & Toubro Ltd. [(2006) 148 STC 616 (S.C.)] principles in relation to liability of sub-contractor are enumerated as under : 1. In a works contract, execution of works if sub-let to sub- contractor, sub contractor is liable for works executed by him – sub contractor cannot be held liable for works contract executed by the contractor. 2. If contractor has rendered liability to whole contracts, no liability of subcontractor 3. If sub-contractor has rendered liability to the contract, no liability of contractor 4. Contractor and sub-contractor both are separately liable for the works executed by them.

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