VAT on Builders- the new perspective

INDER CHAND JAIN

Chairman, Anupam Housing Group, Agra

E mail: inderjain2007@rediffmail.com

M:09319215672

The Builders throughout the State of Uttar Pradesh are facing SIB surveys to bring them under

the purview of VAT. On the basis of the decision of K.Raheja Development Corporation v.

State of Karnataka (2005) 5 SCC 162 & consequential Circular dated December 15, 2005 issued

by the Commissioner of Trade Tax Uttar Pradesh, huge tax liabilities are being illegally fastened

on the builders. The builders, under a bonafide belief and conviction that they are not exigible to

Trade Tax/VAT have not collected any tax from their buyers, are under constant fear of the

unanticipated impending tax liabilities. To add to their woes, the appellate authorities in-spite of

the binding decision of the Allahabad High Court distinguishing K. Raheja, are not granting a

blanket stay on these illegal demands. The builders of Delhi & other states are also being

tormented by their respective VAT departments. In this background, it is necessary to analyse the

issue of exigibility of VAT on builders in the new perspective.

To have a better understanding of the issues involved, it is relevant to look into the history of this

controversy. Under the State Sales Tax Laws, before the 46th Amendment to the Constitution of

India, Sales Tax was applicable only on the sales covered under the sale of goods Act (Normal

sale). The indivisible works contracts were not covered under the State Sales tax Acts since

works contracts were not normal sales. The Supreme Court confirmed this legal status in its land

mark judgment in the case of Gammon & Dunkerely (9 STC 353). Due to this legal status, the

states were denied the levy of Sales Tax on the indivisible works contracts. Such contractors

were outside the purview of sales tax laws.

The then Finance Ministers of the States requested the then Union Finance Minister to take

necessary legal steps so as to levy Sales Tax on indivisible works contracts. Finally, the 46th

amendment to the Constitution of India was made on 2 nd February, 1983 to add a sub-article

(29-4) as under,

“(b) a tax on the transfer of property in goods (whether a goods or in some other form) involved

in the execution of a works contract”.

After the said 46th

Amendment to the Constitution, the States were empowered to levy Sales Tax

/ Works Contract Tax on such sales, called as “Deemed sales” involved in the execution of

works contract. The important features of deemed sales are as under,

(a) It is not a normal sale as defined under sale of goods Act but a deemed sale of goods subject

to sales tax by the States.

(b) In the `deemed sales’ the states can levy Sales tax only on `the transfer of property in goods”.

In other words, the states can levy Sales Tax / VAT only on the `Material Value’ of the works

contract and not on the `labour portion’ of the works contract.

(c) If in a contract there is no transfer of property in goods from the contractor to the contractee,

then sales tax is not applicable on such contracts, called as “Pure Labour Jobs”.

(d) Under the deemed Sale , an artificial break up of indivisible works contract has to be made to

arrive at the `material’ value and the `labour’ value of the contract.

BUSINESS MODELS:

There are basically 2 business models adopted by builders/developers for their projects. These

models are the outcome of the various state laws and business practices in different states.

1) Builder Model: This business model is most common and is adopted in most of the states.

Under this model, the builders purchase land from private landowners or State / Development

Authorities through registered sale deed/ lease deed. Thereafter, the builder gets the building

plans of the Residential/Commercial complex sanctioned by the competent authorities. The

bookings of the residential apartments/commercial units are publicized and the builder

commences construction work. Contracts/agreements for sale are executed with the intending

purchasers specifying the covered area, agreed cost, time duration, number & amount of

instalments, specifications etc. After the building is complete, conveyance/sale/transfer deeds

are executed by the builder in favour of the purchasers in respect of the land as well as the

constructions/superstructure, on which requisite stamp duty is paid as per the provisions of

Stamp Act and the said deed is duly registered. The possession of the demised unit is handed

over to the purchaser simultaneously with the execution of conveyance deed.

2) Developer Model: This business model is in vogue in some of the states, particularly the

Southern states. In this model, the developer enters into a development agreement with

landowner, who hands over the land to the developer for construction of

residential/commercial units. The developer gets the building plans sanctioned. The

developer advertises the project and commences the bookings. The developer enters into

contracts/agreements for construction with the intending purchasers. The construction of

building thereafter commences. After the construction is complete and on receipt of the

agreed amount, the possession of the unit is handed over to the Allottee on the basis of

construction agreement/contract executed earlier. The owner of the land directly transfers the

entire land to the society of owners of the apartments/units who become the owners of

undivided share of land. However, no conveyance deed is executed in respect of the

construction/superstructure by the developer. The Allottee becomes the owner of the

construction/superstructure by virtue of contracts/agreements earlier entered by the

developer. This model is flourishing as stamp duty payable on execution & registration of

sale/transfer deed is legally avoided.

K. RAHEJA’S CASE:

K. Raheja’s case is a case under the Karnataka Sales Tax Act. In order to appreciate what the

Apex Court has decided, the facts of the case are briefly stated as under:

The Company (KRDC) has its office at Bangalore. The company entered into development

agreements with certain owners of land. Thereafter KRDC got the building plans on the said land

sanctioned from the appropriate authorities for building residential apartments and commercial

units. Before starting construction, in most of the cases the company booked units and entered

into agreement for sale with intending purchasers. As per the agreements, on completion of

construction, the residential apartments or the commercial units were agreed to be handed over to

the purchasers, who would get an undivided interest in land also. The owners of the land after the

construction of the complexes transfer the ownership of land directly to the society formed under

Karnataka Ownership Flats (Regulation of Promotion of Construction, Sale, Management and

Transfer) Act 1972. The pertinent fact in this case is that no transfer deed / sale deed/

conveyance deed in respect of super structure/ Constructions of the Residential or Commercial

units is executed by the developer company in favour of the purchasers to transfer the

ownership of superstructure of the units booked by KRDC.

The relevant extracts of clauses q (ii) & r 1(b) of the agreement executed by KRDC with the

intending purchaser are reproduced below:

‘……M/S K. Raheja Development Corporation 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.’

‘K.Raheja Development Corporation, (as Developers) agree to build the said building ‘Raheja

Towers’ having the specifications and amenities therein set out in the Second Schedule

hereunder written and as Developer for the prospective purchaser, the said premises (details

whereof are set out in the third schedule hereunder written) for a lump-sum agreed and

quantified consideration…’ (emphasis supplied)

The revenue took the stand that there was transfer of property in goods pursuant to a works

contract. The company took the stand that there was no works contract. According to the

Karnataka Sales Tax Act works contract includes "any agreement for carrying out either for cash

or for deferred payment or for any other valuable consideration, the building or construction of

any moveable or immoveable property". The company took the stand that they were owners of

land and an owner could not be said to be carrying on works contract on behalf of others. The

Company also pleaded that it was developing the property itself and selling flats and commercial

complexes in that property and in such activities, no works contract was involved. The Court

dismissed the contentions of the company and held as under: -

"To be also noted that the definition does not lay down that the construction be on behalf of

an owner of the property or that the construction cannot be by the owner of the property. Thus

even an owner of the property enters into an agreement to construct for cash, deferred

payment or valuable consideration a building or flats on behalf of anybody else, it would be a

works contract within the meaning of the term as used under the said Act."

The Apex Court further held:

"Thus the appellants are undertaking to build as developers for prospective purchaser. Such

construction/development is to be on payment of a price in various instalments set out in the

agreement. As the appellants are not the owners they claim a "lien" on the property. Of

course, under clause they have right to terminate the agreement and to dispose of the unit if

the breach is committed by the purchaser. However merely having such a clause, does not

mean that an agreement ceases to be a works contract within the meaning of the term in the

said act. All that this means that if there is a termination and that particular unit is not resold

but retained by the appellants, there would be no works contract to that extent. But so long as

there is no termination the construction is for and on behalf of the purchaser. Therefore, it

remains a works contract within the meaning of the term as defined under that said Act. It

must be clarified if the agreement is entered into after flat or unit is already constructed, then

there would be no works contract. But so long the agreement is entered into before the

construction is completed it would be works contract."

In the circumstances of the case, the court held the transaction to be 'Works Contract' exigible to

Karnataka Sales Tax. The decision is binding under article 141 of the Constitution and is the

declaration of the law of the land. Relying on this decision, the VAT/Sales tax Department has

issued notices to Developers/Builders. It cannot be disputed that a builder is liable to Sales Tax/

VAT if there is a ' Works Contract'.

But if there is no 'Works Contract' but a 'Contract for Sale' the question of imposition of Sales

Tax/VAT does not arise. On the given facts the Apex court in K.Raheja's case has held the

activities of the Development Company to be in the nature of 'Works Contract'. But the facts in

case of most of the builders are different. Judicial tests have to applied to determine whether the

activities carried on by these builders are in the nature of a 'Contract for Sale' or a 'Works

Contract'.

PRECEDETIAL VALUE:

K.Raheja is a binding ‘Precedent’ in identical facts and circumstances of the case. It would not

be out of place to mention that a judgment has to be understood in the facts and circumstances of

a particular case without adding anything to it (Sarva Shramik Sangh v Indian Hume Pipe Co.

Ltd (1993) 2 SCC 386,396(SC). The Apex Court has time and again held that a decision is only

an authority on what it actually decides and not what may logically follow from it. Every

judgment must be read as applicable to the particular facts proved, or assumed to be proved,

since the generality of expressions, which may be found there, are not intended to be expositions

of the whole law but governed or qualified by particular facts of the case in which such

expressions are to be found (Union of India v Dhanwanti Devi (1991) 6 SCC 44, 52(SC).

Dalbir Singh & Others v. State of Punjab, AIR 1979 SC 1384 provides guidelines as to how

the judgment of the Supreme Court should be read, understood and applied. The Court held as

under:

“According to the well settled theory of precedents every decision contains three basic

ingredients:

1) finding of material facts, direct and inferential. An inferential finding of a facts is the

inference which the Judge draws from the direct or perceptible facts;

2) Statement of the principles of law applicable to the legal problems disclosed by the

facts; and

3) Judgment based on the combined effect of (i) and (ii) above

For the purpose of the parties themselves and their privias, ingredient no. (iii) is the material

element in the decision for it determines finally their rights and liabilities in relation to the

subject matter of the action. It is the judgment that estops the parties from reopening the

dispute. However, for the purposes of the doctrine of precedents, ingredient No. (ii) is the vital

element in the decisions. This is indeed the ratio decidendi. It is not everything said by a Judge

when giving principle upon which the case is decided and for this reason it is important to

analyse a decision and isolate from it the ratio decidendi”.

It would be apt to refer to the case of Ambica Quarry works v. State of Gujarat, AIR 1987 SC

1073, wherein the Supreme Court held as under:

“The ratio of any decision must be understood in the background of the facts of that case. It

has been said long time was that a case is only an authority for what it actually decides, and

not what logically follows from it. (See Lord Halsbury in Quinn v. Leathes, 1981 AC 4950”

The Supreme Court reiterated this view in the case of The Divisional Controller, KSRTC v.

Mahadeva Shetty & Anr. AIR 2003 4172 wherein it held as under:

“The decision ordinarily is a decision on the case before the Court, while the principle

underlying the decision would be binding as a precedent in a case which comes up for

decision subsequently. Therefore, while applying the decision to a later case, the Court dealing

with it should carefully try to ascertain the principle laid down by the previous decision. A

decision often takes its colour from the question involved in the case in which it is rendered.

The scope and authority of a precedent should never be expended unnecessarily beyond the

needs of a given situation. The only thing binding as an authority upon a subsequent Judge is

the principle upon which the case was decided. Statements which are not part of the ratio

decidendi are distinguished as obiter dicta and are not authoritative. The task of finding the

principle is fraught with difficulty as without an investigation into the facts, it cannot be

assumed whether a similar direction must or ought to be made as measure of social justice.

Precedents sub silentio and without argument are of no moment. Mere casual expression

carry no weight at all. Nor every passing expression of a Judge, however eminent, can be

treated as an ex cathedra statement having the weight of authority.”

The facts & circumstances in the case of Builders, particularly Northern India, are different to K

Raheja's case. Whereas in K. Raheja’s case, the allottee becomes owner of the apartment by

virtue of an agreement executed at the time of booking of the apartment and no transfer deed/sale

deed is executed by the developer in favour of the purchaser, in the case of other builders the

ownership vests in the allottee with the execution and registration of sale deed and

simultaneously handing over the possession of the demised unit. It is pertinent that no transfer

deed was executed in the case of K. Raheja and the allottee becomes the owner of the

superstructure by virtue of the earlier agreement executed at the time of allotment whereas in

case of builders the allottee becomes the owner by virtue of the registered sale deed. Since the

facts are distinguishable, the dictum of K. Raheja is not applicable in general in the case of other

builders and K. Raheja is not a binding precedent in the case of builders with different facts &

circumstances.

CONTRACT FOR SALE v WORKS CONTRACT:

There have been a number of decisions of the Hon'ble Supreme Court where the Court has laid

down tests to determine whether the transaction is in the nature of 'Contract for Sale' or 'Works

Contract'.

The Apex Court in the case of Commissioner of Sales Tax MP v Purshottam Premji (1970) 26

STC 38 (SC) has set out the distinction between a 'Works Contract' and 'Contract for Sale' as

under:

"The primary difference between a contract for work or service and a contract for sale of

goods is that in the former there is in the person performing work or rendering service no

property in the thing produced as a whole not withstanding that a part or even the whole of the

materials used by him may have been his property. In the case of the contract for sale, the

thing produced as a whole has individual existence as the sole property of the party who

produced it, at sometime before delivery, and the property therein passes only under the

contract relating thereto to the other party for price.

Mere transfer of property in goods used in the performance of the contract is not sufficient; to

constitute a sale there must be an agreement express or implied relating to the sale of goods

and completion of an agreement by passing of the title in the very goods contracted to be sold.

Ultimately the true effect of an accretion made pursuant to the contract has to be judged not

by an artificial rule that the accretion may be presumed to have become by virtue of affixing to

a chattel, part of the chattel, but from the intention of the parties to the contract."

The Apex Court in State of Gujarat V/s Kailash Engineering Co. AIR 1976 SC 2108 has held

that if unfinished goods are held as property of the buyer, the transaction / activity is that of a

works contract.

The Apex Court in Union of India V/s CIMMCO AIR 1977 SC 1537 has held that if property in

final article passes only after it is completed, the contract will be of sale, even if raw materials

are purchased on behalf of the buyer.

In the case of Hindustan Aeronautics Ltd. V/s State of Karnataka (1984) 1 SCC 706 (3

Member Bench), the court has held thus at page 714

" It is well settled that the difference between Contract of Service and Contract for Sale of

goods is that in the former, there is the person performing work or rendering service no

property in the things produced as a whole notwithstanding that a part or even the whole of

materials used by him had been his property. In the case of a Contract for Sale, the things

produced as a whole has individual existence as the sole property of the party who produced it

sometime before delivery and the property therein passed only under the contract relating

thereto to the other party for price. It is necessary, therefore in every case for the courts to find

out whether in essence there was any agreement to work for a stipulated consideration. If that

was so, it would not be a sale because even if some sale may be extracted that would not affect

the true position. Merely showing in the bills or invoices, it was contended on behalf of the

appellant, the value of material used in job would not render the contract as one of sale. The

nature and type of the transactions are important and determining factors. What is necessary

to find out, in our opinion, is the document object. It is urged before us that the contract of

sale is one whose main object was to transfer property and the delivery of the possession of

chattel as chattel to the buyer. If the principal object of works undertaken by the party was

transfer of a chattel, the contract would be for sale. It is necessary to find out whether the

contract is primarily a contract for supply of materials at a price agreed between the parties

and the work or service rendered is only incidental to the transfer of property in goods used in

the performance of a contract was not sufficient. To constitute a sale, there must be an

agreement expressed or implied relating to the sale of goods and the performance of the

agreement by passing of the title in those very goods."

The Apex Court in State of Andhra Pradesh V/s Kone Elevators (India) Ltd. AIR 2005 SC

1581(3 member Bench) has drawn distinction between Contract of Sale and Works Contract. It

has held thus:

"There is no standard formula by which one can distinguish a 'Contract for Sale' from

'Works Contract'. The question is largely one of the fact depending upon the terms of the

contract, including the nature of obligations there-under and the surrounding circumstances.

If the intention is to transfer for price a chattel in which the transferee had no previous

property, then the contract is a contract for sale. Ultimately, the true effect of an accretion

made pursuant to contract has to be judged not by artificial rules but from the intention of

parties to the contract. In a ' Contract for Sales', the main object is the transfer of property

and delivery of possession of the property, whereas the main object in a ' Contract for Work' is

not the transfer of property but is one for work and labour. Another test to be often applied to

is: when and how the property of the dealer in such a transaction passed to the customer: is it

by transfer at the time of delivery of the finished article as a chattel or by accession during the

procession of work on fusion to the immovable property of the customer? If it is former, it is '

Sales'; if it is latter, it is ' Work Contract'. ---- the essence of the contract or the reality of the

transaction as a whole has to be taken into consideration. The predominant object of the

contract, the circumstances of the case and the custom of the case provides a guide in deciding

whether the transaction is ' Sale' or 'Work Contract'. -- - - It is settled law that the substance

and not the form is material in determining the nature of transaction.'

The Two main distinctions between sale of goods and work contract, as derived from the

aforesaid decisions of the Apex Court are as under:

Works Contract Sales Contract

1 In Works contract the articles

produced as a whole are never the

absolute property of the maker,

although materials used in the work

contract may have been maker's

absolute property.

In the case of sale of goods, the

articles produced as a whole are the

absolute property of the maker when

they come into existence. The article

produced is then transferred to the

buyer.

2 Property in goods contained in a

works contract pass by accession

during the procession of work.

In the case of sale, goods are sold as

goods i.e. 'chattel as a chattel '. The

property in goods is transferred at the

time of delivery of finished article/

goods.

APPLICABILITY OF TRANSFER OF PROPERTY ACT 1882:

One aspect, which has the ultimate bearing on this issue and which was neither argued &

referred to nor considered by the Apex Court in K.Raheja, is the applicability of the Transfer of

Property Act 1882. In the case of Sale of Immovable Property, the provisions of Transfer of

Property Act are mandatorily applicable.

S.54 of the Transfer of Property Act (Chapter III of Sales of Immovable Property) defines

Sale & Contract for Sale. The said Section is reproduced as under:

“Sale defined” “Sale” is a transfer of ownership in exchange for a price paid or promised

or part-paid and part-promised.

Sale how made. Such transfer, in the case of tangible immovable property of the value of

one hundred rupees and upward, or in the case of a reversion or other intangible thing, can

be made only by a registered instrument.

In the case of tangible immovable property of a value less than one hundred rupees, such

transfer may be made either by a registered instrument or by delivery of property.

Delivery of tangible immovable property takes place when the seller places the buyer or

such person as he directs, in possession of the property.

Contract for sale A contract for the sale of immovable property is a contract that a sale of

such property shall take place on terms settled between the parties.

It does not, of itself, create any interest in or charge on such property.

Thus, in order to constitute a valid sale of immovable property, the Sale/ Transfer can only be by

a registered instrument in view of S.54 of the Transfer of Property Act. Moreover, a contract for

the sale of immovable property, of itself, does not create any interest or charge on such property.

The distinction between Sale and contract for sale has been finely made in Shib Lal v Bhagwan

Das (1889) 11 All 245. It has been held that Sale creates a jus in rem, as it passes ownership

immediately it is executed, and a contract to sell is a jus ad rem, for it only creates an obligation

attached to the ownership of property and does not amount to an interest therein.

Till the time the builder conveys the units unto to the prospective buyers he remains the absolute

owner of the property. If this transaction had been a 'Works Contract' the property would have

not been the absolute property of the builder. Moreover if the apartment would have been

constructed for and on behalf of the prospective buyer, the prospective buyer would have

automatically become the owner of the apartment and there would have been no need/legal

requirement to transfer/ convey the property by the builder to the prospective buyer.

It is pertinent that in the case of K.Raheja, the property passes to the agreement holder by

accession during the procession of work. On the other hand in case of other builders the

ownership of the property in goods is transferred at the time of delivery coupled with the

execution of transfer deed. Applying these principles to developers like K.Raheja, we find that

property in goods pass by accession during procession of work. Moreover the articles produced

i.e. the residential apartments/ commercial units are never the absolute property of the developer

although the construction material had been developer’s absolute property. Thus the Apex Court

rightly held the transaction to be ' Works Contract'.

Thus the true test of whether a transaction is in the nature of ‘Works Contract’ or a ‘Contract for

sale’ is that the mode of transfer of title/ownership & possession pursuant to an earlier

agreement. If no registered conveyance deed has been executed and possession is pursuant to the

earlier contract, the transaction is that of ‘Works Contract’.

EXIGIBILITY TO TRADE TAX/VAT/SALES TAX –APPLYING K. RAHEJA

Following the decision of K. Raheja, the Commissioner of Trade Tax, U P issued a circular dated

15th December 2005. The Circular tends to interpret the decision of the Apex Court and says that

if the agreement between the builder and the prospective purchaser has been entered into before

the date of completion of the construction, it will be treated as a ‘work contract’.

In Civil Writ Petition (Tax) No.1749 of 2006 in the case of ATS Infrastructures Ltd. V State of

U.P & others, the aforesaid Circular has been challenged in Allahabad High Court. A division

bench vide its judgement dated 6 December, 2006 has held as under:

“The circular apparently interprets the decision of the Supreme Court correctly but there is

one ambiguous part in that circular, which says that if the agreement between the builder and

the prospective purchaser has been entered into before the date of completion of the

construction, it will be treated as a ‘work contract’.

Prima facie, the decision of the Supreme Court referred above, does not lead to the above

conclusion. As far as, we have been able to understand the decision of the Supreme Court, it

will apply to cases where the construction is being done by the builder, who may be the owner

of the land, “for and on behalf of” the prospective purchaser. Construction “for and on behalf

of” purchaser would be a ‘work contract’ in view of the decision of the Supreme Court.

Whether the construction is ‘for and on behalf of’ the purchaser is basically a question of fact

to be determined by the fact finding tax authorities, having regard to the totality of facts and

circumstances of each individual case.

The mere fact that the agreement for sale of the flat as a completed unit has been entered into

before the date of actual completion, by itself is not the conclusive factor. Further, the mere

fact that the agreement between the builder and the prospective purchaser provides that if the

prospective purchaser backs out and does not get the sale deed executed ultimately, the

advance instalments or its part or the earnest money or security will stand forfeited is also not

by itself a conclusive factor. The reason is that this kind of an agreement providing for future

sale and charging advance sale consideration or charging earnest money or security could

also be entered into after the completion of the construction and if such agreement entered

into after the completion of construction provides for forfeiture of the earnest money or

security or the advance sale consideration or its part, it would not make the transaction of

‘work contract’.

Therefore, the only factor which is left and which can be said to be a conclusive factor as to

whether agreement between the builder and the prospective purchaser, when entered into

before the completion of the construction, and whether charging advance sale consideration

or not, and whether providing for forfeiture or not will amount to a ‘work contract’ only if the

entirety of facts show that throughout the process of construction, the title to the

superstructure or its various parts at various stages of construction continues with the

prospective purchaser.

If the facts and circumstances show that the title to the super-structure is transferred by a

registered sale deed to the prospective purchaser, in that event, the transaction would not be a

‘work contract’.”

The decision has become final and is binding on all officers of the State. No Special Leave

Petition against the said judgment has been filed by the State of Uttar Pradesh or the Trade

Tax Department before the Apex Court. It is worth mentioning that the State of U.P filed a

Recall application bearing number 27024/2007 against the said order dated 06-12-2006.

Rejecting the said Recall application on merits vide order dated 11-07-2008, the Court held

as under:

“We have heard the matter on merits. We have also gone through our order dated 6-12-2006

by which the writ petition was disposed of.

The order dated 6.12.2006 leaves the question of fact to be decided by the fact finding

authority, after reply to the show cause notice is submitted. The remaining part of the order

only spells out the principle for guidance of the fact finding authority. After hearing both the

sides we do not find anything wrong with the principle spelt out, because of which the State

can be said to be aggrieved. Accordingly, we reject the recall application on merits.”

It would be trite to refer to the decision of the Division Bench of Allahabad High Court in Civil

Writ Petitions No. 997 & 1238 of 2006 in the case of Assotech Realty Private Limited v

State of U.P. and another which has been decided on 23-3-2007.

The facts of the case and the controversy involved are being reproduced from the said

judgement:

“The petitioner is a private company incorporated under the provisions of the Companies Act,

1956. It has its registered office at 5-7, DDA Shopping Complex, Mayur Vihar, Phase-I, Delhi

and head office at F-27-28, Sector 18, Noida, district Gautam Budh Nagar in the State of U.P.

The petitioner is engaged in the business of developing the land purchased from various

authorities and constructing houses with intention of selling them for the consideration to the

interested persons/allottees. According to the petitioner, it had purchased 43123.756 sq.meters

of land situate at 5, Vaibhav Khand, Indrapurum, Ghaziabad from the Ghaziabad

Development Authority, Ghaziabad for development of group housing. The land is free hold

land. It proposed construction of an integrated group-housing complex, known as “Windsor

Park”. Several persons had shown their interest of purchase of the flats/houses. The petitioner

had allotted the houses/flats to various allottees.

In the allotment letter, it has been specifically mentioned that the terms and conditions of

allotment are subject to the sale deed to be signed between the parties. Common areas and

facilities, such as park, parking, public amenities, community hall, etc., as approved in the

layout plan was to remain the property of the petitioner and no rights would accrue to the

allottees till a sale deed is executed and registered. According to the petitioner, it continued to

be the owner of the apartments/flats and construction thereon till the execution of the

registered sale deed. It is the case of petitioner that it does not undertake to make any

construction for and on behalf of the purchasers/allottees and all the constructions made by it

are on its own account in accordance with the layout and sanctioned map approved by the

Ghaziabad Development Authority. No construction have been undertaken on the request of

the allottees. The Assistant Commissioner, Trade Tax, Sector 1, Noida, respondent no.2,

issued a notice purporting to be under Section 7(3) of the U.P. Trade Tax Act1948 (hereinafter

referred to as “the Act”) calling upon it to appear in 29.12.2005 for verification of the papers

in respect of the assessment year 2004-05 U.P./Central. The aforesaid notice was issued on the

basis of a decision of the Apex Court in the case of K. Raheja Development Corporation v

State of Karnataka (2005) 5 SCC 162. The petitioner submitted its reply stating, inter alia, that

the principle laid down in the aforesaid decision of the Apex Court is not applicable in the

case of the petitioner in as much as the petitioner has not undertaken any construction work

for and on behalf of the prospective allottees/purchasers and the title in the flats/apartments so

constructed passes to the purchasers only upon execution of the sale deed and its registration.

Till such time the sale deed is not executed, the right, title and interest including the

ownership and possession in the construction so made remains with the petitioner. In the

circumstances, the notice was requested to be discharged……”

It was vehemently argued by the petitioner that “the right, title, interest, ownership and

possession in the construction/finished flats vests with the petitioner till such time the sale

deed is executed and registered and, therefore, the question of making construction for and on

behalf of the prospective allottees/purchasers is not correct”. It was further argued that “

…the payments made in instalment is only to facilitate the prospective allottees/purchasers so

that they may not be burdened with the price in one go and to facilitate the construction but

from it, it cannot be inferred that the petitioner is making the constructions for and on behalf

of the prospective allottees/purchasers”.

The Court relied upon clause 8 & 20 of the letter of Allotment which are reproduced below:

“8. It is hereby agreed, understood and declared by and between the parties that the ASSOTECH

may take construction finance/demand loan for the construction of the above complex from the

Banks/Financial institutions after mortgaging the land apartments of the said complex, however

the sale deed in respect of the said apartment in favour of allottee(s) will be executed &

registered free from all encumbrances at the time of registration of the same.

20. The allottee agrees that no right will accrue in favour of the allottee in the apartment until a

sale deed is executed & registered, and the ASSOTECH shall continue to be the owner of the

owner of the apartment and also the construction thereupon and this allotment shall not give to

the allottee(s) any rights or title or interest therein even though all payments have been received

by the ASSOTECH. The ASSOTECH shall have the first lien and charge on the apartment for all

its dues that may become due and payable by the allottee(s) to the Assotech.”

The court held thus:

“ From a reading of the aforesaid clauses, we find that the specification, plan, price payment,

schedule and layout plan as has been proposed by the petitioner is to be agreed by the parties.

Further, the petitioner has been empowered to mortgage the land and apartments of the said

complex to raise construction/finance/demand loan for the construction of the complex, from

the banks/financial institutions. The only stipulation is that the sale deed would be executed

and registered free from all encumbrances. The allottees are to strictly adhere to payment

schedule falling which liability for payment of interest accrues. The allottees does not get any

right, title and interest to the allottees even though full payment has been received by the

petitioner. The petitioner is empowered to make variations / modifications in the plan, design

and specification and possession is to be handed only upon payment of the entire amount.

Taking into consideration, the terms and conditions of the letter of allotment, which has been

reproduced above, we are of the considered opinion that the petitioner continues to remain the

owner of the apartments/flats including all constructions till such time the sale deed is

executed and registered in favour of the prospective allottees/purchasers. The payment of

instalments by the prospective allottees/purchasers do not transfer any right, title or interest in

the construction undertaken by the petitioner. Thus, the constructions undertaken by the

petitioner cannot be said to have undertaken by it for and on behalf of the prospective

allottees/purchasers.”

The Court finally held thus:

“In the aforesaid case, the agreement provided that K.Raheja Development Corporation, as

developer on its own behalf and as developer of such person, would construct the flats as a

unit, ultimately to belong to such person. In the aforesaid case, K Raheja Development

Corporation were constructing the unit for and on behalf of the person who had agreed to

purchase the flats. In the present case, we find that the petitioner is constructing the

flats/apartments not for and on behalf of the prospective allottees but otherwise. The payment

schedule would not alter the transaction. The right, title and interest in the construction

continue to remain with the petitioner. It cannot be said that the constructions were

undertaken by the petitioner would not fall under clause (m) of Section 2 read with Section

3F of the Act and are outside the purview of the provisions of the Act. In other words, they

cannot be subjected to tax under the Act and the action in imposing tax on such constructions

treating them to be works contract, is wholly without jurisdiction.

We are, therefore, of the considered opinion that the impugned orders dated 24.03.2006 and

29.5.2006 passed by the Assistant Commissioner Trade Tax, Sector 1, Noida, respondent no. 2

in so far as they relate to imposition of tax on construction of apartments/houses/flats and

other construction in question, are wholly without jurisdiction and they cannot be sustained

and are hereby set aside.”

Thus the aforesaid decisions of Allahabad High Court have held that the builders booking

apartments before the completion of construction of the apartments and receiving advance/part

payments as being not exigible to Sales Tax/Trade Tax.

The State of Uttar Pradesh filed a Special Leave Petition before the Apex Court. The Apex Court

disposing the said Special Leave Petition on 03-12-2007 set aside the order of the High Court on

technical ground that “Writ Petition filed in High Court by the respondent against the Order of

Assessment was not maintainable. The respondent ought to have filed statutory Appeal against

assessment order............ These questions were not capable of being decided in writ petition.”

Since the decision rendered in the Assotech has been set aside purely on technical grounds, the

principles rendered by the High Court cannot be said to have been overruled and apply with full

force to the given facts, even today.

K. RAHEJA REFERRED TO LARGER BENCH:

In the Special Leave Petition No. 17741 OF 2007 in the case of M/S Larsen & Toubro Limited

& Anr. v. State of Karnataka & Anr. vide order dated August 19, 2008 the Division bench of the

Apex Court expressed dissent/disagreement to the decision of K. Raheja and the matter has been

referred to the Larger Bench. In the detailed reference order the Court held:

“It is important to bear in mind the distinction between two types of Contracts sale and works

which rests on the principle that a contract of sales one whose object is transfer of property in

and delivery of possession of a chattel as a chattel to the buyer. When the object of the work

undertaken by the payee for a price is not the transfer of a chattel as a chattel the contract is

one of work and labour.

……….Be that as it may, apart from the disputes in hand, the point which we have to examine

is whether the ratio of the judgment of the Division Bench in the case of Raheja Development

Corporation (supra) as enunciated in Para 20, is correct. If the Develop Agreement is not a

works contract could the Department rely upon the second contract, which is the Tripartite

Agreement and interpret it to be a works contract, as defined under the 1957 Act. The

Department has relied upon only the judgment of this Court in Raheja Development

Corporation (supra) case because para 20 does assist the Department. However, we are of the

view that if the ratio of Raheja Development case is to be accepted then there would be no

difference between works contract and a contract for sale of chattel as a chattel. Lastly, could

it be said that petitioner Company was the contractor for prospective flat purchaser. Under

the definition of the term "works contract" as quoted above the contractor must have

undertaken the work of construction for and on behalf of the contractor for cash, deferred or

any other valuable consideration. According to the Department, Development Agreement is

not works contract but the Tripartite Agreement is works contract which, prima facie, appears

to be fallacious. There is no allegation that the Tripartite Agreement is sham or bogus.

For the afore-stated reasons, we direct the Office to place this matter before the Hon'ble

Chief Justice for appropriate directions in this regard, as we are of the view that the judgment

of Division Bench in the case of Raheja Development (supra) needs re-consideration by the

larger Bench.” (emphasis supplied)

Once the dictum in K. Raheja has been doubted by a detailed and reasoned order and the matter

referred to a larger bench, proprietary demands that Builders should not be taxed by the Revenue

Authorities merely on the basis of this decision or on the basis of circular issued on the basis of

this decision.

DOUBLE TAXATION- SELF CONTADICTORY:

It is undisputable that a transaction in immoveable property can either be a sale of immovable

property attracting Stamps Duty or a Works Contract attracting VAT but by any stretch of imagination it cannot be both. A purchaser of an apartment is required to pay Stamp Duty &

Registration Fee in accordance with the Stamps Act read with the provisions of Transfer of

Property Act, 1882. Ironically, the State is also demanding VAT on these transactions by way of

the Circular dated 16 December 2005. How can the State treat the same transaction

simultaneously as sale of immovable property & works contract and impose double taxation? It

is pertinent that both VAT & Stamp Duty fall under the domain of one State Department i.e Tax

& Registration.

It would be trite to refer to the decision of Ashwani Kumar Tripathi v. State of U.P. & others

2005 (4) AWC 3270. The dispute was regarding chargeability of Stamp Duty on houses/units

constructed by Avas Vikas Parishad (Housing Board) & Development Authorities under Self

Finance Schemes. The Allottees of the Housing Board filed Writ petitions before the Allahabad

High Court challenging the demand of Stamp Duty on the value of superstructure. It was

contended on behalf of the petitioners that the constructions have been raised from their own

money and they are its owners and therefore the question of conveyance or transfer of the

superstructure does not arise. On behalf of the State, it was reiterated that under Self Finance

Scheme remained under the ownership of the Housing Board and constructions raised thereupon

become part & parcel of such land. It was also argued that merely by depositing money in

installments, the Allottees get no right and title in the superstructure.

The Court referred & applied the various provisions of Indian Stamp Act, 1899 and also dealt

with Sections 54 & 55 of the Transfer of Property Act. The Court at para 16,17, 18, 22 & 28

held as under:

“16. Perusal of Sections 54 and 55, Transfer of Property Act, shows that terms and conditions

under Self-Financing Scheme are merely contract for sale without possession and not the sale

with possession as such. Section 55(1)(d) makes it clear that seller is bound, on payment of

land with or without superstructure of flat price, to execute a conveyance deed.

17. The above provisions read with the terms and conditions of Self-Financing Scheme would

go to show that payment in installment is merely a step in aid for completing contract of sale.

Deposition of money (in installment), towards cost of flat/ superstructure, is not as such part

of sale consideration- which itself is not final.

18. Once it is not disputed that land, upon which superstructure, under Self-Financing

Scheme is raised, continues, to be in the ownership of the Parishad Authority any

superstructure fixed or raised by embedding it and making it part of earth/land, allottees-

cannot claim to have interest in it as owner thereof. At no relevant point of time, allottees, who

pay instalments towards cost of construction as such, get no rights transferred or vested in

them with respect to the superstructure raised in land belonging to the Parishad/Authority.

22. In view of terms and conditions of "Self-Financing Schemes" before us, we have no

hesitation in holding that superstructure stood embedded in the land without any right or

interest to the allottees being created therein.

28. We may also point out that, if contention of the petitioners is to be accepted, it will lead to

various complications, anomalies and it will give a handle for avoiding payment of Stamp

Duty on sale transactions by making payment before hand and executing the property

subsequently. Parties get no edge to argue that since they had already paid certain amounts, it

will invariably mean vesting transfer of right or ownership in a given property, cannot be

accepted as a universally correct proposition in law. It will result preposterous.”

This decision became final and is a binding precedent. It is worthwhile to reproduce an important

Government order no. ka.Ni.-5-4122/11-2000-500(9)/99 dated 27 July 2000 issued the

Principal Secretary Tax & Registration, Uttar Pradesh. The said order is reproduced as

under:

la[;k&dk0fu0&5&4122@11&2000&500¼9½@99la[;k&dk0fu0&5&4122@11&2000&500¼9½@99la[;k&dk0fu0&5&4122@11&2000&500¼9½@99la[;k&dk0fu0&5&4122@11&2000&500¼9½@99

izs"kd]izs"kd]izs"kd]izs"kd] Vh0 tktZ tkslsQ]Vh0 tktZ tkslsQ]Vh0 tktZ tkslsQ]Vh0 tktZ tkslsQ] izeq[k lfpo]izeq[k lfpo]izeq[k lfpo]izeq[k lfpo] mRrj izns'k 'kkluAmRrj izns'k 'kkluAmRrj izns'k 'kkluAmRrj izns'k 'kkluA lsok esa]lsok esa]lsok esa]lsok esa] 1111---- leLr e.Myk;qDr ,oaleLr e.Myk;qDr ,oaleLr e.Myk;qDr ,oaleLr e.Myk;qDr ,oa v/;{k fodkl izkf/kdj.k]v/;{k fodkl izkf/kdj.k]v/;{k fodkl izkf/kdj.k]v/;{k fodkl izkf/kdj.k] mRrj izns'kAmRrj izns'kAmRrj izns'kAmRrj izns'kA 2222---- leLr ftykf/kdkjh]leLr ftykf/kdkjh]leLr ftykf/kdkjh]leLr ftykf/kdkjh] mRrj izns'kmRrj izns'kmRrj izns'kmRrj izns'k 3333---- leLr vij ftykf/kdkjh ¼fo0@jk0½ ,oaleLr vij ftykf/kdkjh ¼fo0@jk0½ ,oaleLr vij ftykf/kdkjh ¼fo0@jk0½ ,oaleLr vij ftykf/kdkjh ¼fo0@jk0½ ,oa ftyk fucU/kd] mRrj izns'kAftyk fucU/kd] mRrj izns'kAftyk fucU/kd] mRrj izns'kAftyk fucU/kd] mRrj izns'kA 4444---- leLr mi@lgk;d egkfujh{kd] fucU/ku]leLr mi@lgk;d egkfujh{kd] fucU/ku]leLr mi@lgk;d egkfujh{kd] fucU/ku]leLr mi@lgk;d egkfujh{kd] fucU/ku] mRrj izns'kAmRrj izns'kAmRrj izns'kAmRrj izns'kA 5555---- leLr mifucU/kd]leLr mifucU/kd]leLr mifucU/kd]leLr mifucU/kd] mRrj izns'kAmRrj izns'kAmRrj izns'kAmRrj izns'kA dj ,dj ,dj ,dj ,oa fucU/kuoa fucU/kuoa fucU/kuoa fucU/ku vuqHkkx&5 vuqHkkx&5 vuqHkkx&5 vuqHkkx&5 y[kuÅ % fnuk¡d&27 tqykbZ] 2000y[kuÅ % fnuk¡d&27 tqykbZ] 2000y[kuÅ % fnuk¡d&27 tqykbZ] 2000y[kuÅ % fnuk¡d&27 tqykbZ] 2000 fo"k; % LofoRr iksf"kr ;kstukvksa ds vUrxZr Hkwfe rFkk Hkouksa ds gLrkUrj.k lEcU/kh foys[kksa ds fo"k; % LofoRr iksf"kr ;kstukvksa ds vUrxZr Hkwfe rFkk Hkouksa ds gLrkUrj.k lEcU/kh foys[kksa ds fo"k; % LofoRr iksf"kr ;kstukvksa ds vUrxZr Hkwfe rFkk Hkouksa ds gLrkUrj.k lEcU/kh foys[kksa ds fo"k; % LofoRr iksf"kr ;kstukvksa ds vUrxZr Hkwfe rFkk Hkouksa ds gLrkUrj.k lEcU/kh foys[kksa ds fu"iknufu"iknufu"iknufu"iknu ij LVkEi 'kqYd olwy fd;s tkus ds lEcU/k esaAij LVkEi 'kqYd olwy fd;s tkus ds lEcU/k esaAij LVkEi 'kqYd olwy fd;s tkus ds lEcU/k esaAij LVkEi 'kqYd olwy fd;s tkus ds lEcU/k esaA egksn;]egksn;]egksn;]egksn;] 'kklu ds laKku esa dbZ ,sls izdj.k vk;s gSa'kklu ds laKku esa dbZ ,sls izdj.k vk;s gSa'kklu ds laKku esa dbZ ,sls izdj.k vk;s gSa'kklu ds laKku esa dbZ ,sls izdj.k vk;s gSa ftuesa fodkl izkf/kdj.k LofoRr iksf"kr ftuesa fodkl izkf/kdj.k LofoRr iksf"kr ftuesa fodkl izkf/kdj.k LofoRr iksf"kr ftuesa fodkl izkf/kdj.k LofoRr iksf"kr ;kstuk ds;kstuk ds;kstuk ds;kstuk ds vUrxZr vkoafV;ksa dh Hkouksa dk fuekZ.k djds mldk gLrkraj.k djrs gSa fdUrq cSukek vUrxZr vkoafV;ksa dh Hkouksa dk fuekZ.k djds mldk gLrkraj.k djrs gSa fdUrq cSukek vUrxZr vkoafV;ksa dh Hkouksa dk fuekZ.k djds mldk gLrkraj.k djrs gSa fdUrq cSukek vUrxZr vkoafV;ksa dh Hkouksa dk fuekZ.k djds mldk gLrkraj.k djrs gSa fdUrq cSukek djrs le; foys[kdjrs le; foys[kdjrs le; foys[kdjrs le; foys[k esa dsoy Hkwfe dk gLrkUrj.k fn[kkrs gSa ,oa mlh ds ewY; ds vk/kkj ij LVkEi esa dsoy Hkwfe dk gLrkUrj.k fn[kkrs gSa ,oa mlh ds ewY; ds vk/kkj ij LVkEi esa dsoy Hkwfe dk gLrkUrj.k fn[kkrs gSa ,oa mlh ds ewY; ds vk/kkj ij LVkEi esa dsoy Hkwfe dk gLrkUrj.k fn[kkrs gSa ,oa mlh ds ewY; ds vk/kkj ij LVkEi 'kqYd dk Hkqxrku djkrs'kqYd dk Hkqxrku djkrs'kqYd dk Hkqxrku djkrs'kqYd dk Hkqxrku djkrs gSaAgSaAgSaAgSaA 2222---- 'kklu }kjk bl lEcU/k esa fopkj djrs gq;s ;g ik;k x;k gS fd mijksDr izfØ;k fof/kd 'kklu }kjk bl lEcU/k esa fopkj djrs gq;s ;g ik;k x;k gS fd mijksDr izfØ;k fof/kd 'kklu }kjk bl lEcU/k esa fopkj djrs gq;s ;g ik;k x;k gS fd mijksDr izfØ;k fof/kd 'kklu }kjk bl lEcU/k esa fopkj djrs gq;s ;g ik;k x;k gS fd mijksDr izfØ;k fof/kd n`f"Vn`f"Vn`f"Vn`f"V ls mfpr ugha gS ,oa ,sls foys[kksa esa Hkouksa ds ewY; dks 'kkfey u fd;s tkus ds dkj.k Hkkjh ls mfpr ugha gS ,oa ,sls foys[kksa esa Hkouksa ds ewY; dks 'kkfey u fd;s tkus ds dkj.k Hkkjh ls mfpr ugha gS ,oa ,sls foys[kksa esa Hkouksa ds ewY; dks 'kkfey u fd;s tkus ds dkj.k Hkkjh ls mfpr ugha gS ,oa ,sls foys[kksa esa Hkouksa ds ewY; dks 'kkfey u fd;s tkus ds dkj.k Hkkjh djkioapudjkioapudjkioapudjkioapu gks jgk gSA LofoRr iksf"kr ;kstuk ds vUrxZr fof/kd :i ls mfpr dk;gks jgk gSA LofoRr iksf"kr ;kstuk ds vUrxZr fof/kd :i ls mfpr dk;gks jgk gSA LofoRr iksf"kr ;kstuk ds vUrxZr fof/kd :i ls mfpr dk;gks jgk gSA LofoRr iksf"kr ;kstuk ds vUrxZr fof/kd :i ls mfpr dk;Zokgh ;gh gks Zokgh ;gh gks Zokgh ;gh gks Zokgh ;gh gks ldrh gS fd IykVldrh gS fd IykVldrh gS fd IykVldrh gS fd IykV dk ykVjh }kjk vkea=.k gksus ij igys foØ; foys[k] iV~Vk foys[k vFkok Ýh dk ykVjh }kjk vkea=.k gksus ij igys foØ; foys[k] iV~Vk foys[k vFkok Ýh dk ykVjh }kjk vkea=.k gksus ij igys foØ; foys[k] iV~Vk foys[k vFkok Ýh dk ykVjh }kjk vkea=.k gksus ij igys foØ; foys[k] iV~Vk foys[k vFkok Ýh gksYM foys[k dk iathdj.kgksYM foys[k dk iathdj.kgksYM foys[k dk iathdj.kgksYM foys[k dk iathdj.k gks] rRi'pkr IykV /kkjd lEcfU/kr fodkl izkf/kdj.k] vkokl fodkl gks] rRi'pkr IykV /kkjd lEcfU/kr fodkl izkf/kdj.k] vkokl fodkl gks] rRi'pkr IykV /kkjd lEcfU/kr fodkl izkf/kdj.k] vkokl fodkl gks] rRi'pkr IykV /kkjd lEcfU/kr fodkl izkf/kdj.k] vkokl fodkl ifj"kn~ vFkok iathd`r vkoklifj"kn~ vFkok iathd`r vkoklifj"kn~ vFkok iathd`r vkoklifj"kn~ vFkok iathd`r vkokl fodkl lfefr;ksa ds i{k esa ;g izLrko ikfodkl lfefr;ksa ds i{k esa ;g izLrko ikfodkl lfefr;ksa ds i{k esa ;g izLrko ikfodkl lfefr;ksa ds i{k esa ;g izLrko ikfjr djsa fd lEcfU/kr fjr djsa fd lEcfU/kr fjr djsa fd lEcfU/kr fjr djsa fd lEcfU/kr laLFkk IykV /kkjdksa ds iSls ls fd'rksa esalaLFkk IykV /kkjdksa ds iSls ls fd'rksa esalaLFkk IykV /kkjdksa ds iSls ls fd'rksa esalaLFkk IykV /kkjdksa ds iSls ls fd'rksa esa ;Fkk fu/kkZfjr Js.kh ds Hkouksa dk fuekZ.k djsaA blds ckn ;Fkk fu/kkZfjr Js.kh ds Hkouksa dk fuekZ.k djsaA blds ckn ;Fkk fu/kkZfjr Js.kh ds Hkouksa dk fuekZ.k djsaA blds ckn ;Fkk fu/kkZfjr Js.kh ds Hkouksa dk fuekZ.k djsaA blds ckn lEcaf/kr laLFkk viuh fu;ekoyh ds vUrxZrlEcaf/kr laLFkk viuh fu;ekoyh ds vUrxZrlEcaf/kr laLFkk viuh fu;ekoyh ds vUrxZrlEcaf/kr laLFkk viuh fu;ekoyh ds vUrxZr fu/kkZfjr 'krksZ ds v/khu Hkouksa dk fuekZ.k djkdj fu/kkZfjr 'krksZ ds v/khu Hkouksa dk fuekZ.k djkdj fu/kkZfjr 'krksZ ds v/khu Hkouksa dk fuekZ.k djkdj fu/kkZfjr 'krksZ ds v/khu Hkouksa dk fuekZ.k djkdj IykV /kkjdksa dks miyC/k djk;sa] ,slh fLFkIykV /kkjdksa dks miyC/k djk;sa] ,slh fLFkIykV /kkjdksa dks miyC/k djk;sa] ,slh fLFkIykV /kkjdksa dks miyC/k djk;sa] ,slh fLFkfr esa ghfr esa ghfr esa ghfr esa gh Hkou dk fuekZrk IykV/kkjd dks ekuk tk Hkou dk fuekZrk IykV/kkjd dks ekuk tk Hkou dk fuekZrk IykV/kkjd dks ekuk tk Hkou dk fuekZrk IykV/kkjd dks ekuk tk ldrk gS rFkk lEcfU/kr laLFkk dks Bsdsnkj ds :i esa ekuk tkldrk gS rFkk lEcfU/kr laLFkk dks Bsdsnkj ds :i esa ekuk tkldrk gS rFkk lEcfU/kr laLFkk dks Bsdsnkj ds :i esa ekuk tkldrk gS rFkk lEcfU/kr laLFkk dks Bsdsnkj ds :i esa ekuk tk ldrk gSA Hkwfe dk foØ; foys[k] ldrk gSA Hkwfe dk foØ; foys[k] ldrk gSA Hkwfe dk foØ; foys[k] ldrk gSA Hkwfe dk foØ; foys[k] iV~Vk foys[k vFkok Ýh gksYM foØ; foys[k fu"ikfnr djkdjiV~Vk foys[k vFkok Ýh gksYM foØ; foys[k fu"ikfnr djkdjiV~Vk foys[k vFkok Ýh gksYM foØ; foys[k fu"ikfnr djkdjiV~Vk foys[k vFkok Ýh gksYM foØ; foys[k fu"ikfnr djkdj iathd`r djk;s cxSj IykV /kkjd iathd`r djk;s cxSj IykV /kkjd iathd`r djk;s cxSj IykV /kkjd iathd`r djk;s cxSj IykV /kkjd mlds ekfyd ugha cu ldrs gSa Hkys mlds ekfyd ugha cu ldrs gSa Hkys mlds ekfyd ugha cu ldrs gSa Hkys mlds ekfyd ugha cu ldrs gSa Hkys gh os vkoaVh gksa vkSj os fdlh Hkhgh os vkoaVh gksa vkSj os fdlh Hkhgh os vkoaVh gksa vkSj os fdlh Hkhgh os vkoaVh gksa vkSj os fdlh Hkh laLFkk dks izLrko ikfjr laLFkk dks izLrko ikfjr laLFkk dks izLrko ikfjr laLFkk dks izLrko ikfjr djds vFkok mlds i{k esa iSls tek djds Hkou fuekZ.k dh vuqefr ugha nsdjds vFkok mlds i{k esa iSls tek djds Hkou fuekZ.k dh vuqefr ugha nsdjds vFkok mlds i{k esa iSls tek djds Hkou fuekZ.k dh vuqefr ugha nsdjds vFkok mlds i{k esa iSls tek djds Hkou fuekZ.k dh vuqefr ugha ns ldrs gSaA ;fn os ldrs gSaA ;fn os ldrs gSaA ;fn os ldrs gSaA ;fn os ,slk djrs gSa rks var esa tc lEifRr dk cSukek gksxk rks mlesa Hkwfe ,oa Hkou nksuksa ds,slk djrs gSa rks var esa tc lEifRr dk cSukek gksxk rks mlesa Hkwfe ,oa Hkou nksuksa ds,slk djrs gSa rks var esa tc lEifRr dk cSukek gksxk rks mlesa Hkwfe ,oa Hkou nksuksa ds,slk djrs gSa rks var esa tc lEifRr dk cSukek gksxk rks mlesa Hkwfe ,oa Hkou nksuksa ds gh gh gh gh foØ; dks nf'kZr djukfoØ; dks nf'kZr djukfoØ; dks nf'kZr djukfoØ; dks nf'kZr djuk iM+sxk ,oa nksuksa ds ewY;kadu ds vk/kkj ij gh LVkEi 'kqYd dk Hkqxrku iM+sxk ,oa nksuksa ds ewY;kadu ds vk/kkj ij gh LVkEi 'kqYd dk Hkqxrku iM+sxk ,oa nksuksa ds ewY;kadu ds vk/kkj ij gh LVkEi 'kqYd dk Hkqxrku iM+sxk ,oa nksuksa ds ewY;kadu ds vk/kkj ij gh LVkEi 'kqYd dk Hkqxrku djukdjukdjukdjuk iM+sxkAiM+sxkAiM+sxkAiM+sxkA 3333---- mijksDr dks ns[krs gq, 'kklu }kjk jftLVªh djus okys ,oa dysDVj dh 'kfDr;ksa dk mijksDr dks ns[krs gq, 'kklu }kjk jftLVªh djus okys ,oa dysDVj dh 'kfDr;ksa dk mijksDr dks ns[krs gq, 'kklu }kjk jftLVªh djus okys ,oa dysDVj dh 'kfDr;ksa dk mijksDr dks ns[krs gq, 'kklu }kjk jftLVªh djus okys ,oa dysDVj dh 'kfDr;ksa dk mi;ksxmi;ksxmi;ksxmi;ksx

djds LVkEi oknksa dk fuLrkj.k djus okys leLr vf/kdkfj;ksa dks ;g funsZ'k fn;s djds LVkEi oknksa dk fuLrkj.k djus okys leLr vf/kdkfj;ksa dks ;g funsZ'k fn;s djds LVkEi oknksa dk fuLrkj.k djus okys leLr vf/kdkfj;ksa dks ;g funsZ'k fn;s djds LVkEi oknksa dk fuLrkj.k djus okys leLr vf/kdkfj;ksa dks ;g funsZ'k fn;s tkrs gSa fd os tkrs gSa fd os tkrs gSa fd os tkrs gSa fd os LofoRrLofoRrLofoRrLofoRr iksf"kr ;kstuk ds vUrxZr mfpr LVkEi 'kqYd ds Hkqxrku dk ijh{k.k djrs le; mijksDr iksf"kr ;kstuk ds vUrxZr mfpr LVkEi 'kqYd ds Hkqxrku dk ijh{k.k djrs le; mijksDr iksf"kr ;kstuk ds vUrxZr mfpr LVkEi 'kqYd ds Hkqxrku dk ijh{k.k djrs le; mijksDr iksf"kr ;kstuk ds vUrxZr mfpr LVkEi 'kqYd ds Hkqxrku dk ijh{k.k djrs le; mijksDr ckrksa dk /;kuckrksa dk /;kuckrksa dk /;kuckrksa dk /;ku j[ksa ,oa tgka Hkh IykV ds foØ; foys[k] iV~Vk foys[k vFkok ÝhgksYM foys[k dk j[ksa ,oa tgka Hkh IykV ds foØ; foys[k] iV~Vk foys[k vFkok ÝhgksYM foys[k dk j[ksa ,oa tgka Hkh IykV ds foØ; foys[k] iV~Vk foys[k vFkok ÝhgksYM foys[k dk j[ksa ,oa tgka Hkh IykV ds foØ; foys[k] iV~Vk foys[k vFkok ÝhgksYM foys[k dk iathdj.k djk;s cxSjiathdj.k djk;s cxSjiathdj.k djk;s cxSjiathdj.k djk;s cxSj gh fdlh laxBu ds ek/;e ls Hkou fuekZ.k gh fdlh laxBu ds ek/;e ls Hkou fuekZ.k gh fdlh laxBu ds ek/;e ls Hkou fuekZ.k gh fdlh laxBu ds ek/;e ls Hkou fuekZ.k djk;k x;k gks oakg ij djk;k x;k gks oakg ij djk;k x;k gks oakg ij djk;k x;k gks oakg ij lEifRr ds cSukesa ds le; Hkwfe ,oalEifRr ds cSukesa ds le; Hkwfe ,oalEifRr ds cSukesa ds le; Hkwfe ,oalEifRr ds cSukesa ds le; Hkwfe ,oa Hkou nksuksa ds ewY;kadu ds vk/kkj ij LVkEi 'kqYd dk Hkou nksuksa ds ewY;kadu ds vk/kkj ij LVkEi 'kqYd dk Hkou nksuksa ds ewY;kadu ds vk/kkj ij LVkEi 'kqYd dk Hkou nksuksa ds ewY;kadu ds vk/kkj ij LVkEi 'kqYd dk Hkqxrku djk;k tkuk lqfuf'pr djsaA ;fn iwoZ esaHkqxrku djk;k tkuk lqfuf'pr djsaA ;fn iwoZ esaHkqxrku djk;k tkuk lqfuf'pr djsaA ;fn iwoZ esaHkqxrku djk;k tkuk lqfuf'pr djsaA ;fn iwoZ esa ,sls dksbZ foys[k Hkou dk ewY; lfEefyr djds ,sls dksbZ foys[k Hkou dk ewY; lfEefyr djds ,sls dksbZ foys[k Hkou dk ewY; lfEefyr djds ,sls dksbZ foys[k Hkou dk ewY; lfEefyr djds LVkEi M~;wVh tek djk;s cxSj iathd̀r fd;s x;s gksa rksLVkEi M~;wVh tek djk;s cxSj iathd̀r fd;s x;s gksa rksLVkEi M~;wVh tek djk;s cxSj iathd̀r fd;s x;s gksa rksLVkEi M~;wVh tek djk;s cxSj iathd̀r fd;s x;s gksa rks llllEcfU/kr mifucU/kdx.k bldk ijh{k.k EcfU/kr mifucU/kdx.k bldk ijh{k.k EcfU/kr mifucU/kdx.k bldk ijh{k.k EcfU/kr mifucU/kdx.k bldk ijh{k.k dj ysa rFkk ,sls ekeysa ftlesa mijksDr ds vk/kkj ij dehdj ysa rFkk ,sls ekeysa ftlesa mijksDr ds vk/kkj ij dehdj ysa rFkk ,sls ekeysa ftlesa mijksDr ds vk/kkj ij dehdj ysa rFkk ,sls ekeysa ftlesa mijksDr ds vk/kkj ij deh LVkEi ik;k tk; vkSj tks 4 o"kZ ds LVkEi ik;k tk; vkSj tks 4 o"kZ ds LVkEi ik;k tk; vkSj tks 4 o"kZ ds LVkEi ik;k tk; vkSj tks 4 o"kZ ds vUnj gh iathdr̀ fd;s x;s gksa muds lEcU/k esa /kkjk&47 d ¼3½ dsvUnj gh iathdr̀ fd;s x;s gksa muds lEcU/k esa /kkjk&47 d ¼3½ dsvUnj gh iathdr̀ fd;s x;s gksa muds lEcU/k esa /kkjk&47 d ¼3½ dsvUnj gh iathdr̀ fd;s x;s gksa muds lEcU/k esa /kkjk&47 d ¼3½ ds vUrxZr LVkEiokn pyk;s vUrxZr LVkEiokn pyk;s vUrxZr LVkEiokn pyk;s vUrxZr LVkEiokn pyk;s tkus dh dk;Zokgh djkuk lqfuf'pr djsaAtkus dh dk;Zokgh djkuk lqfuf'pr djsaAtkus dh dk;Zokgh djkuk lqfuf'pr djsaAtkus dh dk;Zokgh djkuk lqfuf'pr djsaA 4444---- dddd`i;k mijksDr funsZ'kksa dk dM+kbZ ls vuqikyu lqfuf'pr djkrs gq, bldh izkfIr Lohdkj `i;k mijksDr funsZ'kksa dk dM+kbZ ls vuqikyu lqfuf'pr djkrs gq, bldh izkfIr Lohdkj `i;k mijksDr funsZ'kksa dk dM+kbZ ls vuqikyu lqfuf'pr djkrs gq, bldh izkfIr Lohdkj `i;k mijksDr funsZ'kksa dk dM+kbZ ls vuqikyu lqfuf'pr djkrs gq, bldh izkfIr Lohdkj djusdjusdjusdjus dk d"V djsaAdk d"V djsaAdk d"V djsaAdk d"V djsaA

Hkonh;]Hkonh;]Hkonh;]Hkonh;]

Vh0 tktZ tkslsQVh0 tktZ tkslsQVh0 tktZ tkslsQVh0 tktZ tkslsQ

izeq[k lfpoizeq[k lfpoizeq[k lfpoizeq[k lfpo

la[;k&d0fu0&5&4122@11&2000 rn fnukad %la[;k&d0fu0&5&4122@11&2000 rn fnukad %la[;k&d0fu0&5&4122@11&2000 rn fnukad %la[;k&d0fu0&5&4122@11&2000 rn fnukad % izfrfyfi fuEufyf[kr dks lwpukFkZ ,oa vko';d dk;Zokgh gsrq izsf"kr %&izfrfyfi fuEufyf[kr dks lwpukFkZ ,oa vko';d dk;Zokgh gsrq izsf"kr %&izfrfyfi fuEufyf[kr dks lwpukFkZ ,oa vko';d dk;Zokgh gsrq izsf"kr %&izfrfyfi fuEufyf[kr dks lwpukFkZ ,oa vko';d dk;Zokgh gsrq izsf"kr %& 1111---- izeq[k lfpo] vkS|ksfxd fodkl foHkkx] mRrj izns'k 'kkluAizeq[k lfpo] vkS|ksfxd fodkl foHkkx] mRrj izns'k 'kkluAizeq[k lfpo] vkS|ksfxd fodkl foHkkx] mRrj izns'k 'kkluAizeq[k lfpo] vkS|ksfxd fodkl foHkkx] mRrj izns'k 'kkluA 2222---- lflflflfpo] vkokl foHkkx] mRrj izns'k 'kkluApo] vkokl foHkkx] mRrj izns'k 'kkluApo] vkokl foHkkx] mRrj izns'k 'kkluApo] vkokl foHkkx] mRrj izns'k 'kkluA 3333---- LVkEi vk;qDr ,oa vij lfpo] jktLo ifj"kn] mRrj izns'k] bykgkcknALVkEi vk;qDr ,oa vij lfpo] jktLo ifj"kn] mRrj izns'k] bykgkcknALVkEi vk;qDr ,oa vij lfpo] jktLo ifj"kn] mRrj izns'k] bykgkcknALVkEi vk;qDr ,oa vij lfpo] jktLo ifj"kn] mRrj izns'k] bykgkcknA 4444---- vkokl vk;qDr] 104 egkRek xk¡/kh ekxZ] y[kuÅAvkokl vk;qDr] 104 egkRek xk¡/kh ekxZ] y[kuÅAvkokl vk;qDr] 104 egkRek xk¡/kh ekxZ] y[kuÅAvkokl vk;qDr] 104 egkRek xk¡/kh ekxZ] y[kuÅA vkKk lsvkKk lsvkKk lsvkKk ls

;w0 ds0 ,l0 pkSgku;w0 ds0 ,l0 pkSgku;w0 ds0 ,l0 pkSgku;w0 ds0 ,l0 pkSgku

fo'ks"k lfpofo'ks"k lfpofo'ks"k lfpofo'ks"k lfpo

The Uttar Pradesh Government cannot take divergent views. It has to speak with ONE VOICE.

It has taken a clear stand that conveyance is required where the payment towards an

apartment/unit is received in installments as no ownership vests until a Transfer Deed is

executed. How can it take a different view that such an activity tantamount to ‘works contract’

chargeable to VAT? It would be apt to refer to the Judgment of the Apex Court in Vadilal

Chemicals Ltd v. The State of Andra Pradesh & others 2005 AIR 3073. The Court Held thus:

“The Department of Industries and Commerce which was responsible for the issuance of the

1993 G.O. accepted the appellant as an eligible industry for the benefits. Apart from the fact

that it can be assumed that the Department of Industries was in the best position to construe

its own order, we can also assume that in framing the scheme and granting eligibility to the

appellant all the departments of the State Government involved in the process had been duly

consulted. The State, which is represented by the Departments, can only speak with one

voice.”

Moreover, the rate of Stamp Duty in the State of Uttar Pradesh is 7%. The rate of VAT under

composition scheme for contracts made before 30 December 2010 is 2%. Even if a builder does

not opt for composition scheme and purchases construction material through tax invoices, the

liability towards VAT would be not be more than 2%. In such circumstances, it would be

beneficial for the State to collect Stamp Duty under the Stamps Act & not tax the transactions

under VAT Act. The same shall be in consonance with the law laid down by the Apex Court and

the Allahabad High Court, binding on all the officers of the State. This stand would also be in

conformity to the Government order dated 27 July 2000, referred to above. It is pertinent that this

Government Order has been issued by the Principal Secretary, Tax & Registration who heads

both the VAT Department & the Stamps & Registration Department. It is equally important to

note that the Allottees of the Housing Board/ Development Authorities/the private builders are

paying the requisite Stamps Duty in pursuance to the aforesaid Government Order and the

binding final decision of the Allahabad High Court in Ashwani Kumar Tripathi v. State of U.P.

& others 2005 (4) AWC 3270 (supra).

STAND OF THE MINISTRY OF FINANCE, GOVERNMENT OF INDIA IN RESPECT

TO THESE TRANSACTIONS:

It would be worthwhile to reproduce the Circular no. 108/02/2009, wherein the Ministry of

Finance elucidated the transactions of Builders and resolved the controversy. Para 3 of the said

Circular clearly confirms the final view point of the Ministry of Finance, Government of India

and is vital in deciding the present controversy of chargeability of VAT on Builders.

Circular No. 108/02/2009 – ST

F. No. 137/12/2006-CX.4

Government of India

Ministry of Finance

Department of Revenue

Central Board of Excise and Customs

***

New Delhi, dated 29th January 2009

Subject: Imposition of service tax on Builders - regarding

************

Construction of residential complex was brought under service tax w.e.f.01.06.2005. Doubts

have arisen regarding the applicability of service tax in a case where developer /

builder/promoter enters into an agreement, with the ultimate owner for selling a dwelling unit in

a residential complex at any stage of construction (or even prior to that) and who makes

construction linked payment. The ‘Construction of Complex’ service has been defined under

Section 65 (105)(zzzh) of the Finance Act as “any service provided or to be provided to any

person, by any other person, in relation to construction of a complex”. The ‘Construction of

Complex’ includes construction of a ‘new residential complex’. For this purpose, ‘residential

complex’ means any complex of a building or buildings, having more than twelve residential

units. A complex constructed by a person directly engaging any other person for designing or

planning of the layout, and the construction of such complex intended for personal use as

residence by such person has been excluded from the ambit of service tax.

2. A view has been expressed that once an agreement of sale is entered into with the buyer

for a unit in a residential complex, he becomes the owner of the residential unit and subsequent

activity of a builder for construction of residential unit is a service of ‘construction of residential

complex’ to the customer and hence service tax would be applicable to it. A contrary view has

been expressed arguing that where a buyer makes construction linked payment after entering into

agreement to sell, the nature of transaction is not a service but that of a sale. Where a buyer

enters into an agreement to get a fully constructed residential unit, the transaction of sale is

completed only after complete construction of the residential unit. Till the completion of the

construction activity, the property belongs to the builder or promoter and any service provided

by him towards construction is in the nature of self service. It has also been argued that even if it

is taken that service is provided to the customer, a single residential unit bought by the individual

customer would not fall in the definition of ‘residential complex’ as defined for the purposes of

levy of service tax and hence construction of it would not attract service tax.

3. The matter has been examined by the Board. Generally, the initial agreement between the

promoters / builders / developers and the ultimate owner is in the nature of ‘agreement to sell’.

Such a case, as per the provisions of the Transfer of Property Act, does not by itself create any

interest in or charge on such property. The property remains under the ownership of the seller (in

the instant case, the promoters/builders/developers). It is only after the completion of the

construction and full payment of the agreed sum that a sale deed is executed and only then the

ownership of the property gets transferred to the ultimate owner. Therefore, any service provided

by such seller in connection with the construction of residential complex till the execution of

such sale deed would be in the nature of ‘self-service’ and consequently would not attract service

tax. Further, if the ultimate owner enters into a contract for construction of a residential complex

with a promoter / builder / developer, who himself provides service of design, planning and

construction; and after such construction the ultimate owner receives such property for his

personal use, then such activity would not be subjected to service tax, because this case would

fall under the exclusion provided in the definition of ‘residential complex’. However, in both

these situations, if services of any person like contractor, designer or a similar service provider

are received, then such a person would be liable to pay service tax. (emphasis supplied)

4. All pending cases may be disposed of accordingly. Any decision by the Advance Ruling

Authority in a specific case, which is contrary to the foregoing views, would have limited

application to that case only. In case any difficulty is faced in implementing these instructions,

the same may be brought to the notice of the undersigned.

(Gautam Bhattacharya)

Commissioner (Service Tax)

CBEC, New Delhi

It is expected that the State Governments shall also issue necessary clarifications, in conformity

to the aforesaid clear stand of the Union Government of India.

MAHARASHTRA AMENDMENT ON VAT PURSUANT TO K.RAHEJA:

The Government of Maharashtra pursuant to the judgment of the Supreme Court in the matter of

K.Raheja (supra) amended the definition of sale w.e.f 12 June 2006 to bring the Agreement for

sale of apartments under the purview of VAT. The Maharashtra Chamber of Housing Industry

(MCHI) filed a Tax Writ Petition in the High Court of Mumbai. The Court vide Order dated 08-

02-2007 restrained from levy and collection of VAT till final order. The relevant paragraph of

the order is reproduced as under:

“ Such members of the Petitioner No. 1, who on regular basis, furnish information and data to

the Sales –Tax authorities will not be compelled to be registered as ‘dealers’ liable to pay tax

under the Maharashtra Value Added Tax, 2002. No order of assessment shall be passed in

respect of ‘sale of flats’ under the Maharashtra Ownership Flats Act in building/s

constructed/under construction by the members of the Petitioner No. 1` as ‘unregistered

dealers’ or as ‘registered dealers’. It will be open to the Respondents to process the

information up to the stage of passing of assessment order/s.”

No other National or State Builders Association has approached their respective High Court to

obtain a blanket stay in terms of the aforesaid order of the Mumbai High Court. It is strongly

advised that Builders Association of India, NARDECO, CREDAI and other State Builders

Associations to move to their respective High Courts to obtain such order and save their

members from the illegal levy of VAT.

The Maharashtra Government was not getting revenue from VAT from Builders due to the

operation of blanket Stay Order referred to above. The matter was reconsidered by the Cabinet

and a new simple Composition Scheme has been introduced w.e.f 1st April, 2010 vide

Notification No. VAT. 1510/CR-65/Taxation-1 dated 9th July, 2010 under which 1% VAT would

be payable on the aggregate value of Agreement or the value as per the Bombay Stamps Act,

whichever is higher. Although the scheme is simple but the Builders are not paying VAT on the

pretext that the imposition of VAT is illegal and unwarranted and also on the ground of the

continuance of the earlier blanket stay on VAT vide Mumbai High Court Order dated 08-02-

2007, referred to above.

LEGAL VALIDITY OF THE TRADE TAX CIRCULAR DATED 15-12-2005:

The said circular had been issued by the Commissioner Trade Tax with a view to implement the

decision of the Apex court in K. Raheja. Since this decision itself is pending reconsideration by a

larger bench of the Apex Court, the circular itself has become redundant. More so after the

binding decision of ATS Infrastructures rendered by the Allahabad High Court clarifying that K.

Raheja is not applicable to the facts & circumstances as they exist in the State of Uttar Pradesh.

Moreover, it is well settled law that departmental circulars cannot levy tax on something, which

is not taxable under the Act. The circulars are meant to clarify the law and not to lay down a Law

(Advise Advertising Pvt. Ltd. Vs Union of India 2001 (131) ELT 529 (Mad).

CONCLUSION:

In the light of discussions made above, it is crystal clear that the Builders of North India,

particularly Uttar Pradesh, are not liable to VAT even if they make bookings from prospective

purchasers before the completion of their project, collect the Allotment price in instalments as

they remain the owners of the superstructure and the ownership in the superstructure is

transferred only on execution of Sale/Transfer Deed. The dictum of K. Raheja does not apply to

the Builders as the facts and circumstances of these Builders are different from that of K. Raheja

in as much as they transfer the ownership of the superstructure of the unit by way of registered

sale deed and not by accession as in K. Raheja. More so as K. Raheja is not a Precedent and has

been rightly distinguished by the Allahabad High Court in ATS Infrastructures case (supra). The

binding precedent in Ashwani Kumar Tripathi v. State of U.P. & others 2005 (4) AWC 3270

(supra) and the Government order no. 5-4122/11-2000-500(9)/99 dated 20 July2000 should

be respected and followed. Moreover, judicial proprietary demands that huge illegal tax demands

be not made by the assessing authorities on the basis of K. Raheja as its veracity is under shadow

as the matter is sub- judice before a larger bench of the Apex Court. The Appellate Courts & the

High Courts should also grant a total stay to these illegal demands in all pending cases. Last but

not the least, the Supreme Court should give out of turn expeditious hearing to this important

case so that the controversy is finally settled and litigations pending at different forums may end.

INDER CHAND JAIN

Chairman, Anupam Housing Group, Agra

E mail: inderjain2007@rediffmail.com

M:09319215672