Copyright 2013, Lakshmikumaran & Sridharan S UPREME C OURT J UDGMENT IN THE CASE OF L&T L IMITED 10 th October, 2014

Copyright 2013, Lakshmikumaran & Sridharan

SUPREME COURT JUDGMENT IN THE CASE OF L&T LIMITED

10th October, 2014

2Copyright 2013, Lakshmikumaran & Sridharan / Confidential

COVERAGE & SCOPE


Coverage BRIEF BACKGROUND:

K. Raheja Development Corporation

Environment prevailing after K. Raheja-industry reaction

Subsequent developments

L&T LIMITED VS. STATE OF KARNATAKA

IMPACT ON THE DEVELOPERS

WAY FORWARD


BRIEF BACKGROUND


K. Raheja Development

Corporation vs.

State of Karnataka


K. Raheja

Land OwnerLand OwnerDeveloperDeveloper Agreement to develop flatsAgreement to develop flats

Intending PurchaserIntending Purchaser

Society formed under KOFA

Society formed under KOFA


K. Raheja

Works Contract Definition

Works Contract Definition

Wide and InclusiveWide and InclusiveIncludes “any agreement” for

building construction, for consideration

Includes “any agreement” for building construction, for

consideration

Agreement with purchaser prior to completion of construction

Agreement with purchaser prior to completion of construction

Works ContractWorks Contract Not a Works ContractNot a Works Contract

Agreement with purchaser after

completion of construction

Agreement with purchaser after

completion of construction


Environment prevailing after

K. Raheja-industry reaction


Assotech Realty Pvt. Ltd

Petitioner constructing house on land purchased and developed by it, for selling them to interested purchasers

Allottees not getting any right in house till sale deed is executed

Allahabad High Court:

Construction not undertaken for and on behalf of prospective allottees

On facts, transaction not works contract

Supreme Court set aside the decision on technical grounds - no comments on the merits


Magus Construction Pvt. Ltd. Developer enters into ‘flat purchase agreements’ – during the

construction

Registered agreement for sale- before accepting the advance payment

Issue before Gauhati High Court: Whether developer providing “Commercial or industrial construction service/ construction of complex service”

HELD:

Title in flat/apartments passes to customer only on execution of sale deed and registration thereof

Payment made by prospective purchaser is against consideration of sale

Construction not on behalf of prospective purchaser

Therefore, no taxable service


Peculiar factual matrix in K. Raheja

Judgment inapplicable where:Construction for selfSale deed/conveyance deed after construction

Sale of immovable property

Industry View


Subsequent developments


Amendment to Maharashtra VAT Explanation to Section 2(24) amended:

“…including an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction…of any movable or immovable property.”

Rule 58(1A) inserted:In case of a construction contract where immovable property, land or an interest in the land is transferred to

the purchaser along with property in goods involved in the execution of the construction contract, then such a transfer will be chargeable to VAT excluding cost of land.


Amendment to Maharashtra VAT…contd.

Notification dated 10th July, 2010:

Composition scheme for dealer who undertakes the construction of flats, dwellings or buildings or premises and transfers them in pursuance of an agreement along-with land or interest underlying the land.

.


Maharashtra Chamber of Housing Industry

Constitutional Validity challenged before the Bombay High Court: Amendment to the definition of Sale

Insertion of Rule 58 (1A)

Notification dated 10th July, 2010

Validity of the amendment upheld: Amendment only clarificatory


Service Tax-Amendments Explanation inserted w.e.f. 1.7.2010 by

the Finance Act, 2010

Construction of residential complex; and construction of commercial/industrial building intended for sale, wholly or partly, by a builder or any person authorized by builder before, during of after construction deemed to be service provided by builder to the buyer if any sum is received before grant of completion certificate


L&T LIMITED

VS.

STATE OF KARNATAKA


L&T Limited

Land OwnerLand OwnerLarsen and Toubro

Larsen and Toubro

Joint Development Agreement

Joint Development Agreement

Intending PurchaserIntending Purchaser

Sale deed in favour of purchaser by L&T and Land OwnerSale deed in favour of purchaser by L&T and Land Owner


L&T Limited

KARNATAKA HIGH COURT-SINGLE JUDGE

•Controversy covered by the Supreme Court decision in the case of K. Raheja (Para 16 and 19)

KARNATAKA HIGH COURT – DIVISION BENCH

•Controversy covered by the Supreme Court decision in the case of K. Raheja

SUPREME COURT-DIVISION BENCH

•The correctness of view taken in Raheja Development doubted:

•If Raheja is relied upon, no difference between sale simplicitor and WCT•Is the developer a contractor for prospective flat purchaser?•If the development agreement is not a works contract could the department rely upon the tripartite agreement and interpret it to be works contract?

•Referred for consideration by Larger Bench


L&T Limited: Supreme Court-Larger Bench

ARGUMENTS PUT FORTH BEFORE THE LARGER BENCH

APPELLANTS (L&T AND ORS.) STATE OF MAHARASHTRA AND KARNATAKA

•Phrase in “some other form” takes colour from “transfer of property in goods” (Para 25)

•Construction by developer not at the behest of flat purchaser (Para 26)

•Stamp duty (Para 30)

•Accretion is sine qua non for works contract (Para 31)

• For levy of sales tax there must be works contract i.e. contract for construction, fabrication and the like, goods deemed to have been sold should be involved in the works contract, and property in goods should be transferred to third party (Para 40)

•Dominant intention not applicable and accretion not decisive (Para 46)

•Raheja wrong to the extent it says agreement for sale entered post completion of construction is not works contract (Para 42)

•“In some other form” means goods may cease to be goods i.e. they may merge into immovable property(Para 44-47)

•Works contract may be coupled with sale of immovable property (Para 45)


L&T Limited: Supreme Court-Larger Bench

Consideration of correctness of K. Raheja decision as

referred by division bench

Consideration of correctness of K. Raheja decision as

referred by division bench

UPHELD K.RAHEJAUPHELD K.RAHEJA

Appeals from Maharashtra against the M.C.H.I. judgment

Appeals from Maharashtra against the M.C.H.I. judgment

UPHELD M.C.H.I.UPHELD M.C.H.I.


IMPACT ON THE

DEVELOPERS


Judgment’s impact on Developers

“Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not

denude of its character as works contract.”

“It cannot be said to be an absolute proposition of law that

the ownership of the goods must pass by way of accretion.”

“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.”


Contd…

Issues:

Works Contract-widest coverage Relevance of definition of ‘works

contract’ in States: ‘means’ and ‘includes’

Retrospective or prospective applicability? Exposure for the past period


Contd...

“So long as the agreement is entered into before the construction is complete it would be works contract.”

“Activity undertaken by the developer would be works contract only from the stage the developer enters into a

contract with the flat purchaser.”

ISSUES•What is meant by completion of construction? Completion Certificate?

•Construction of a three storied building being undertaken

•Agreement to sell first floor entered into while second floor is being constructed

WHETHER SALE OF FIRST FLOOR WORKS CONTRACT OR NOT?

ISSUES•What is meant by completion of construction? Completion Certificate?

•Construction of a three storied building being undertaken

•Agreement to sell first floor entered into while second floor is being constructed

WHETHER SALE OF FIRST FLOOR WORKS CONTRACT OR NOT?


“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.”ISSUES

•What is “value of goods at the time of incorporation”?

•Method to determine the value of goods and land?

•What will be the value of the goods in cases of back to back sub-contracting?

•Deduction

•Applicability of decision in the case of State of A.P. vs. L&T [2008 (SC)]

•Input Tax Credit

•Concession Forms

ISSUES

•What is “value of goods at the time of incorporation”?

•Method to determine the value of goods and land?

•What will be the value of the goods in cases of back to back sub-contracting?

•Deduction

•Applicability of decision in the case of State of A.P. vs. L&T [2008 (SC)]

•Input Tax Credit

•Concession Forms

Contd…


Judgment’s impact on Service Tax

Taxability of deemed construction service prior to deeming it as service ?


WAY FORWARD


Way Forward

Specific scheme based on the value of goods at the time of incorporation

Composition scheme for developers

Deduction of sub-contractor’s turnover wherever available


AHMEDABAD

HYDERABAD

BENGALURUCHENNAI

PUNE

NEW DELHI

5 Link Road, Jangpura Extension, opp. Jangpura Metro

Station, New Delhi 110014MUMBAI

401 - 404, Kakad Chambers

132, Dr. Annie Besant Road, Worli

Mumbai - 400 018

Phone: +91 (22) 2491 4382/84/86

CHENNAI

2, Wallace Garden 2nd Street

Chennai - 600 006

Phone: +91 (44) 4396 1600

BANGALORE

‘World Trade Centre,

26/1. Dr.Rajkumar Road,

Bangalore - 560005

Phone: +91 (80) 4933 1800

HYDERABAD

‘Hastigiri’, 5-9-163, Chapel Road,

Opp. Methodist Church, Nampally, Hyderabad -

500001

Phone: +91 (40) 4129 9811

AHMEDABAD

B-334 (3rd floor), SAKAR-VII, Nehru Bridge Corner,

Ashram Road, Ahmedabad-380 009

Phone: +91 (79) 4001 4500

PUNE

607-609, Nucleus, 1 Church Road, Camp, Pune –

411 001

Phone: 020-66801900

Maharashtra

E-mail : [email protected]

KOLKATA2nd Floor, Kanak Building,41, Chowringhee Road, Kolkata – 700 071.


Thank you

Documents

Copyright 2013, Lakshmikumaran & Sridharan S UPREME C OURT J UDGMENT IN THE CASE OF L&T L IMITED 10 th October, 2014