Supreme Court Larger Bench upholds Raheja Development
After all, the term "works contract" is nothing but a contract in which one of the parties is obliged to undertake or to execute works - Supreme Court
IN a landmark judgement in Raheja Development Corporation Vs. State of Karnataka reported in , the Supreme Court had held that the activities undertaken by builders for construction of flat/building for or on behalf of the prospective customers for consideration in cash or deferred payment is covered under the works contract and not under sale.
In the Raheja case, Raheja after entering into development agreement with the landowners the residential apartments were constructed on obtaining plan approvals. Before construction of residential apartments, agreements were entered into with prospective buyers. The agreements provide for giving undivided land share, construction of residential apartment, provision for car parking in the ground floor etc,.
The Court held this to be a works contract liable to pay tax under the Karnataka Act.
In Larsen & Toubro Limited & Anr Vs State of Karnataka & Anr - , Supreme Court doubted the correctness of the judgement of the Court in Raheja Development Corporation and felt the decision needs re-consideration by a larger Bench.
The Larger Bench gave its decision yesterday in a marathon judgement running into 85 pages, approving Raheja and holding that it lays down the correct legal position.
The Larger Bench summarised the legal position, as:
(i) 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 either as goods or in some other form.
(ii) For the purposes of Article 366(29-A)(b), in a building contract or any contract to do construction, if the developer has received or is entitled to receive valuable consideration, the above three things are fully met. It is so because in the performance of a contract for construction of building, the goods (chattels) like cement, concrete, steel, bricks etc. are intended to be incorporated in the structure and even though they lost their identity as goods but this factor does not prevent them from being goods.
(iii) Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. The term "works contract" in Article 366 (29- A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services alone. Nothing in Article 366(29-A)(b) limits the term "works contract".
(iv) Building contracts are species of the works contract.
(v) A contract may involve both a contract of work and labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and contract for work (or service) is virtually diminished.
(vi) The dominant nature test has no application and the traditional decisions which have held that the substance of the contract must be seen have lost their significance where transactions are of the nature contemplated in Article 366(29-A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contract. The enforceability test is also not determinative.
(vii) A transfer of property in goods under clause 29-A(b) of Article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made.
(viii) Even in a single and indivisible works contract, by virtue of the legal fiction introduced by Article 366(29-A)(b), there is a deemed sale of goods which are involved in the execution of the works contract. Such a deemed sale has all the incidents of the sale of goods involved in the execution of a works contract where the contract is divisible into one for the sale of goods and the other for supply of labour and services. In other words, the single and indivisible contract, now by Forty-sixth Amendment has been brought on par with a contract containing two separate agreements and States have now power to levy sales tax on the value of the material in the execution of works contract.
(ix) The expression "tax on the sale or purchase of goods" in Entry 54 in List 11 of Seventh Schedule when read with the definition clause 29-A of Article 366 includes a tax on the transfer of property in goods whether as goods or in the form other than goods involved in the execution of works contract.
(x) Article 366(29-A)(b) serves to bring transactions where essential ingredients of 'sale' defined in the Sale of Goods Act, 1930 are absent within the ambit of sale or purchase for the purposes of levy of sales tax. In other words, transfer of movable property in a works contract is deemed to be sale even though it may not be sale within the meaning of the Sale of Goods Act.
(xi) Taxing the sale of goods element in a works contract under Article 366(29-A)(b) read with Entry 54 List 11 is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of immovable property. The value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat purchaser after incorporation of goods.
We bring you this judgement today. Please see Breaking News
Though this is a case relating to Sales Tax/VAT/Turnover Tax/WCT, it had its ripples in Service Tax.
In early 2006, the then DG, Service Tax tried to make the Raheja judgement applicable to Service Tax and since then, this has been haunting Service Tax and to this day disputes are continuing unabated. Please see -23.02.2006.