HD Desai - Work Contract

8/7/2019 HD Desai - Work Contract

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Construction activity - K.RAHEJA or L & T

Article by: Mr. HEMANT DESAIAdvocate VAT SURAT

E-mail: [email protected]

1. The trend in construction industry is known to all concerned that the promoter of the projectpurchases the land and develops the project. The promoter owns compete right in the land andthe development be carried out for the customer on principal to principal basis without havingany contractual relationship. Intended buyer enter into agreement for purchase of property andnot for construction of it, in another wordthe promoterkeeps their right until the transfer ofownership and possession, the property constructed by them is for themselves and not for andon behalf of somebody else. Promoter is the land owner who develops the project at their ownas per approved plan and common specifications enter into agreement for sale of property andreceive payment by instalments. They will execute conveyance deed of sale for ready flat

without any sale or construction agreement during the ongoing construction. They will carry outthe activity as real estate developer holding the title of the land in the name of them and thenthey will provide the right to use and occupy the demarcated premises on the basis ofmembership. In entire activity the title of the property always remains with promoter. Thecustomer will get possession rights in lieu of holding shares of the constructed complex. Theywill render services as developer acting for them as such with complete material and labour oftheir own.

2. In light of the aforesaid facts, can inference be drawn that liability to pay Value Added Taxarises under Gujarat Value Added Tax Act, 2003 (for short Act, 2003). In order to appreciatethe inference and their applicability to the aforesaid facts, it would be necessary to noterelevant facts leading to inference. Relevant facts which rise to the incidence of tax stand in

paragraph as below.

3. The promoter who is engaged in construction of his own land purchased by them, make theconstruction after obtaining approval of building plans submitted to the town planning authority.In light of building plans submitted, the promoter construct the complex, at their own cost andas per their own specifications as per approved building plans submitted by them to theconcerned town planning authority. The construction going to be made subject tospecifications which shall made by them in the light of building plans submitted by them to thetown planning authority. Once the construction is completed, it consists either of flats orbungalows or of raw houses. They will be allotted to different prospective purchasers as pertheir own requirements. The ownership of the constructed portion on the land of them remainswith them who is promoter. According to the requirements of the prospective purchaser, they

book accommodation in the proposed construction which would obviously be situated in theirown land. Booking has to be done by them by taking suitable instalments of purchase price byway of advance as may be agreed between the parties. However, generally they make clear tothe prospective purchaser that title to the allotted accommodation to him of the constructedportion will pass on to the purchaser only on being give possession of the building constructedby the organizer on payment of full purchase price and on execution of relevant documentsevidencing ultimate sale of such accommodation to the prospective purchaser. So it is obviousthat the title to the respective allotted property have remain all throughout with them tillpayment is fully received after handing over possession followed by relevant sale deed bywhich title is then passed to the concerned allottee of the structure. Thus, prospectivepurchaser ultimately becomes full owner at that stage of allotted part of the structureconstructed by them i.e. promoter of his own land. The advance payment by way of instalmentreceived by them i.e. organizer ultimately gets adjusted against the final payment to be

received from the purchaser on passing of the title of the constructed portion to the prospectivepurchaser. Generally it is also made clear that construction which has been agreed to be


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allotted to the prospective purchaser on taking desired accommodation in the building to beconstructed by the owner will be handed over to the prospective purchaser accordingly onexecution of the sale deed but it will be strictly on as is where is basis meaning thereby, theconstruction is done as per specifications relied upon by the promoters themselves who is theowner of the building till the title ultimately passes to the purchaser. No change in approvedplan relied upon by the promoters is entertained during construction and the purchaser has

ultimately to take allotted constructed complex as given to him by the promoters. The only rightwhich is made available by construction of building to the prospective purchaser by thepromoter is advance allotment of portion of building for which advance payment of price byinstalments is taken by the owner from the prospective purchaser. In short, the entireconstruction is done by the builder on his own land without taking any specific instructionsregarding proposed construction portion from the prospective purchaser i.e. nature ofconstruction of property and use of material for the said construction are entirely within thediscretion and decision of the developer. While handing over allotted portion in the constructedbuilding ultimately to the prospective purchaser, the portion concerned has been handed overto the prospective purchaser in the same form in which it existed after full construction hasbeen carried out by them i.e. build as per their own specifications and it is in the form in whichit is so constructed which has been accepted by the prospective purchaser when gettingpossession and title to the said property. Generally the promoters make it clear that no

additional fixtures in allotted portion of the building will be fixed even if suggested by theprospective purchaser. The additional fixtures, if any, as per choice of the purchaser may befixed by the purchaser or get fixed by him after he becomes owner of the sold property handedover to him by the builder.

4. Two conflicting decisions of the Apex Court can be found on the subject matter. First isK.RAHEJA DEVELOPMENT CORPORATION v. STATE OF KARNATAKA reported in (2005)141 STC 298; 2005 (5) SCC 162; AIR 2005 SC 2350 held that consideration received towardssale of flats even though on ownership basis are also liable to tax for the reason that suchtransactions of construction and sale of individual flats are in nature of works contract and thusliable to tax under provisions of KST Act, 1957. Second is LARSEN & TOUBRO LTD. v. STATEOF KARNATAKA reported in (2008) 17 VST 460 SC held that ratio of decision supra if

accepted then there would be no difference between works contract and contract for sale ofchattel to chattel. The Division Bench of the Apex Court directed the matter to be place beforethe Honble Chief Justice for appropriate direction and re-consideration of a decision citedsupra. I respectfully agree with the view expressed by the aforesaid Division Bench and submitthat, the person engaged in construction activity can be considered to have been undertaken ofhis own by the promoter on his own land as full owner thereof cannot be termed as workscontractor. The promoter on behalf of ultimate purchaser of the allotted portion of propertypasses the title of the portion of property which is immovable.

5. For the concerned question, we have to see the statutory background which is operating in thefield. In the first instance, refer to Act, 2003 the relevant provisions thereof can be usefullynoted at this stage. The preamble of the Act, 2003 shows that it is enacted to consolidate and

amend the laws relating to the levy and collection of tax on value added basis in respect ofsale or purchase of goods in the State of Gujarat. It, therefore, becomes clear that levy of thisvalue added tax is on sale and purchase of goods in the State of Gujarat. So far ascompetence of the State legislature is concerned, refer to Article 246 (2) of the constitutionwhich provides in sub- Article (3) that subject to clauses (1) and (2), the Legislature of anyState, has exclusive power to make laws for such State or any part thereof with respect to anyof the matters enumerated in List II in the Seventh Schedule. Schedule VII (II), entry 54 whichdeals with taxes on the sale or purchase of goods other than newspapers, subject to theprovisions of Entry 92A of List I. We are not concerned with Entry 92A of list I of the schedulewhich is union List and which deals with taxes on the purchase or sale of goods other thannewspapers, where such purchase or sale takes place in the course of inter State trade andcommerce, as we are dealing with Act, 2003 in its operation to cover transaction of sale andpurchase of goods within the State of Gujarat and as the business is conducted in the State of

Gujarat. Thus only Entry 54 of Schedule VII (II) will be relevant for consideration. Therefore, itmust be shown that promoter sells any of his constructed portions to the prospectivepurchaser. The transaction in the real sense between the builder on the one hand and


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prospective purchaser on the other hand necessarily refers to immovable property and notgoods. But the parliament enacted by way of amendment to Article 366 by inserting Sub-Article(29A) which deals with definition of tax on sales or purchase of goods. Amongst others,Article 36(29A) (b) has brought within its sweep, tax on the transfer of property in goods(whether as goods or in some other form) involved in the execution of a works contract.Therefore, in a works contract, whenever a person constructs a building by acting as works

contractor and while executing such work, whatever goods uses in the construction ultimatelypass to the purchaser he would be said to have executed works contract. It is obvious thatbefore the works contract can be said to have been executed by the contractor, the buildershould operate as contractor who would put up construction as required by the owner whomakes available his land to the contractor for constructing building of his choice. Thus, neitherownership of the land nor constructed portion would belong to the contractor as such. In fact,in such a contingency by way of works contract in the strict sense, as understood by theConstitution-scheme, contractor must be employed by the owner to construct building ofowners choice on owners land. Thus, owner is an employer and contractor is a merecontractor who carries out instructions of the owner and in the light of whichever instructionsthe owner/employer issues, the contractor has to put up the construction as desired by theowner. Thus, there are two parties to such a pure and simple work contract, viz. contractor onthe one hand and the owner/employer on the other hand.

6. Now the question arise as to whether Act, 2003 has considered as to what is the real nature ofworks contract to be covered by the sweep of it in the light of Article 366 (29A) (b) read withEntry 54 of list II of Schedule VII. In this connection, we may refer to definition section 2 of Act,2003. Relevant definition of section 2 (10) dealing with dealer who will be covered by Act,2003. The definition provides that dealer means any person who, for the purpose of orconsequential to his engagement in or, in connection with or incidental to or in the course ofhis business, buys, sells, manufactures, makes, supplies or distributes goods, directly orotherwise, whether for cash or deferred payment, or for commission, remuneration orotherwise and includes (f)- any person who transfers property in goods (whether as goods or insome other form) involved in the execution of a works contract. Therefore, before any builderor promoter can be brought in net work of Act, 2003 by treating him as a dealer, it must be

shown that he is involved in execution of a works contract, then only, section 2(10) (f) can getattracted. it is also to be read with section 2(30) which defines taxable turnover. It statestaxable turnover means the turnover of all sales or purchase of a dealer during the prescribedperiod in any year, which remains after deducting there from various items mentioned therein.Clause (c) of section 2 (30) provides that in case of turnover of sales in relation to workscontract, the charges towards labour, service and other like charges, and subject to suchconditions as may be prescribed be deducted from taxable turnover of all sales and purchasesof a dealer, provided that in the cases where the amount of charges towards labour, serviceand other like charges in such contracts are not ascertainable from the terms and theconditions of the contract, the amount of such charges shall be calculated in such manner asmay be prescribed. The term prescribed has been defined to mean prescribed by rules, asper section 2 (17). Purchase price is defined by section 2 (18) to mean, amongst others, asprovided by sub clause (b)- to the effect-in relation to the transfer of property in goods

(whether as goods or in some other form) involved in the execution of work contract, suchamount as is arrived at by deducting from the amount of valuable consideration paid orpayable by a person for the execution of such works contract, the amount representing labourcharges for such execution.

7. Refer to another definition of sale price can be found in section 2 (24) which means theamount of valuable consideration paid or payable to a dealer or received or receivable by adealer for any sale of goods made including the amount of duties levied or leviable under theCentral Excise Tariff Act , 1985 or the Customs Act,1962 and any sum charged for anythingdone by the dealer in respect of the goods at the time of or before delivery thereof andincludes- (b) in relation to the transfer of property in goods {whether as goods or in some otherform} involved in the execution of works contract, such amount as is arrived at by deducting

from the amount of valuable consideration paid or payable to a person for the execution ofsuch works contract, the amount representing labour charges for such execution,Consequently, in the light of section 2(24)(b), it becomes clear that in a genuine works


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by the competent authority under the Act, 2003 to certify that dealer shown therein has beenregistered under the said Act.

11.Therefore, on reading Form 101 with Form 102, it becomes clear that before a dealer canapply for registration and ultimately to be registered as dealer acting as work contractor, his

nature of business should be as works contractor simplicitor as understood by the Constitutionscheme. The third relevant Form 214. This form is as per rule 28 (8) of the rule. When we turnto rule 28 (8), we find that as per sub clause (a) of rule 28 (8) of the rules, a provision is madefor enabling a dealer covered by the Act to apply in Form 214 who has under section 14Aopted to pay a lump sum tax by way of composition of tax in lieu of the amount of tax leviableupon him under section 7 on the turn over of sales of goods (whether as goods or in any otherform) involved in the execution of works contract, and accordingly, the Commissioner maypermit such dealer to get benefit of the provision, When we turn to Form 214, as seen in thelight of rule 28 (8), second clause of the said form indicates nature of applicants business tobe executing works contract.

12.In the light of the aforesaid relevant statutory scheme of the Act and the Rules, we have to

consider what is a genuine works contract carried on by the contractor to be treated as dealerunder the Act, 2003 and under the rules framed there under. This general concept of workscontract as culled out from the Constitution scheme came up for consideration before threeConstitution Benches of the Supreme Court as under:

13.In the case of GANNON DUNKERLY v. STATE OF RAJASHTHAN, (1993) 88 STC 204;(1993) 1 SCC 364, in para 27.34 and 36, the Constitution Bench of the Supreme courtapproving the case of BUILDERS ASSOCIATION OF INDIA v. UNION OF INDIA, in (1989) 73STC 370; (1989) 2 SCC 645 which is an earlier Constitution bench judgment, has taken theview that entry 54 of Schedule VII (II) empowers the State Legislature to impose a tax on thesale of materials involved in works contract such as the construction of building. In otherworks, it includes a tax on the transfer of property in goods in the same, or in some other form,involved in the execution of a works contract.

14.The second judgment is earlier Constitution Bench judgment in the case of BUILDERSASSOCIATION OF INDIA v. UNION OF INDIA, (1989) 73 STC 370; (1989) 2 SCC 645 reportwherein Venkataramaiah, J spoke for the Supreme Court in connection with connotation of theword works contract as understood by the Constitution scheme. The said para reads asunder:

It becomes clear in the light of the aforesaid Constitution Bench judgment that genuine works contract asunderstood by the Constitution only empowers the State legislature to enact provisions for bringing underthe cover of Sales tax Act or Vat Act, as the case may be, transaction between the builder contractorsimplicitor on the one hand and the owner as employer for constitution of such structure on the other.Consequently, it is clear that as understood by the Constitution Bench judgment in Builders Association

case a genuine works contract would be between the builder contractors on the one hand and the owner/employer on the other hand.

15.The same view is also taken by later Constitution Bench of the Supreme court in the case ofBUILDERS ASSOCIATION OF INDIA v. STATE OF KARNATAKA, (1993) 88 STC 248; AIR1993 SC 991 dealing with Karnataka Sales tax Act (25 of 1957) as amended by Act (27 of1985) concerning liability of sales tax in works contract executed by the builder S.C. Agrawal, Jspoke for the Constitution Bench in para 2 of the report and mentioned relevant facts leadingto this question. In that case, the appellant before the Supreme Court was Association ofcontractors engaged in the work of construction and while executing such work as workscontractor, various parameters of works contract as understood by the Constitution were laiddown in the said decision in the light of earlier decision of the Supreme Court in AIR 1989 SC

1371. Other decision of the Supreme court in the case of GANNON DUNKERLY & Co. v.STATE OF RAJASHTHAN was also considered and it was observed as under by S.C.Agrawal, J in para 2:


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The aforesaid Constitution scheme regarding genuine works contract as laid down by the said threeConstitution Bench judgment of the Supreme court leaves no room for doubt that before a builder can betreated to have executed works contract, he should do so at the behest of and under the instruction ofowner who may be owner or allottee of the land on which he wants the contractor to put up constructionsrequired by the owner and as per owners specifications and while executing such genuine workscontract if any material gets embedded belonging to the contractor in such building, the value of such

embedded material which may ultimately pass on to the owner/employer after completion of execution ofworks contract, will be treated as sale of embedded article being cost in some form or the other whichmay be treated as sale of this material by the contractor to the original owner/employer subject toexceptions carved out in AIR 1993 SC 991, para2. Thus, value of such embedded material which may beused by the contractor while discharging his work as work contractor may amount to sale of his materialso embedded whose benefit ultimately goes to the employer when he takes possession of theconstructed portion, Consequently , it is very clear that in order to be treated as genuine works contract,especially in execution of works contract under the Act, 2003 or the rules, the interpretation put forwardby the aforesaid three Constitution Bench judgment of the Supreme court regarding real nature of workscontract as understood by the Constitution scheme enabling the State legislature to cover suchtransaction of works contract in the net work of Sales tax/ VAT Act will have to be kept in view.

16.Accordingly, the legal position in the light of the Act, 2003 and the rules when considered

keeping in view the connotation of word works contract as explained in the aforesaid threeconstitution bench judgments, can be illustrated as under:

If owner/employer employs building contractor for putting up construction of his choice on hisown land, then it would be works contract in the real sense of term as per the constitutionscheme under Article 366 (29A) (b) read with entry 54 of Schedule VII (II).

i) If the land belongs to the promoter and the latter puts up construction as desired by theprospective purchaser as per his own requirement and as per prospective purchasersspecification, then when the constructed portion is given in possession to the prospectivepurchaser, the value of embedded material in such structure may be covered by the termworks contract as builder would be contractor on behalf of owner/employer for building up

such construction of employers choice and the land belonging to the contractor to whichthe building is attached may also result in transfer of that portion of under ground landultimately to the employer getting the construction done, but the value of embedded landwould not be covered by works contract as it would be immovable property but onlyembedded material which ultimately passes on to the employer with the building soconstructed as per his own choice by the builder would be covered by the genuine workscontract.

ii) However, if the land belongs to the builder and he puts up construction at his own cost onthe land and ultimately sells the constructed portion to the prospective purchaser on as iswhere is basis, then till the title of the said construction passes on to the purchaser, itremains with the builder and would result in sale of constructed portion ultimately to the

prospective purchaser and it would not be a case of a works contract, as such, as thebuilding is not constructed by the contractor acting as contractor of an employer. He is aself employed person who puts up construction as per his own specifications on his ownland and ultimately passes on the constructed portion to the prospective purchaser and tilldate, the title remains with the builder. This would be a case which would not be coveredby the scheme of works contract as understood by the Constitution scheme and asinterpreted by the aforesaid three Constitution bench judgments of the Supreme court.Only first two types of illustrated cases may be covered as instances of genuine workscontracts.

17.Now, is the time to consider the decision of a two judge of the Supreme Court in the case of K.RAHEJA DEVELOPMENT CORPORATION v. STATE OF KARNATAKA (2005) 141 STC 298;

2005 (5) SCC 162; AIR 2005 SC 2350. In this case, S.N.Variava,J. speaking for the SupremeCourt held in the light of the express definitions of the term works contract in section 2 (1) (V-1) of the Karnataka Sales tax Act, 1957 that because the definition of works contract in


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Karnataka Act is an inclusive definition and does not include merely a works contract asnormally understood, it is a wide definition which includes any agreement for carrying outbuilding or construction activity for cash, deferred payment or other valuable consideration andaccordingly, in the light of express definition of works contract under the Karnataka Act, theappeal filed by the developer K. Raheja Development Corporation was dismissed confirmingthe decision of the High Court against the appellant in that case. So far as this judgment is

concerned, it becomes clear that earlier three Constitution bench judgments of the SupremeCourt especially one reported in AIR 1993 SC 991 which considered the very same KST Act1957 were not cited or noticed by the said bench. But even that apart, in the aforesaiddecision, the conclusion was based solely on the basis of inclusive definition of word workscontract under the Karnataka Act. It may also be noted that no argument was advanced orconsidered in the aforesaid decision regarding the scope and ambit of genuine works contractas contemplated by the Constitution and as interpreted by the aforesaid three constitutionbench judgments which may appear to be a contrary view about connotation of the wordworks contract as may be expanded by definition by any state legislature and which maymake more inclusive definition of a works contract in the state Act as against the Constitutionscheme envisaged by entry 54, schedule VII (II) read with Article 366 (29A) (b) as interpretedby the Supreme Court in the aforesaid three Constitution bench judgments. As such agrievance was not raised regarding vires of such a more inclusive definition of works contract

under the KST Act, 1957 that aspect was obviously not considered in Raheja case (supra). Bethat as it may, in the said decision, more comprehensive definition without challenge to its viresas enacted by the KST Act, 1957 was taken into consideration and relevant observations weremade in para 11 after considering inclusive definition of works contract under the KST Act,1957. In this connection, it was observed in para 11 as under:

18.It may be noted that in para 10 of the said decision, the Bench of the Supreme Court has notedthe definition of dealer under the KST Act, 1957 being section 2 (1) (k) which is pari materialwith the definition of dealer under the Act, 2003 in section 2 (10) (f). Similarly, taxableturnover as defined under the KST Act, 1957 is parallel to section 2 (30) of the Act, 2003. Thebench has also noted section 5B of the KST Act, 1957 which is charging section in the KSTAct, 1957 which is pari material with section 7 (1) of the Act, 2003. But even that apart, what is

a clinching circumstance which heavily weighed with the Bench in the said decision is the morecomprehensive definition of works contract under the KST Act, 1957 and that has reallyturned the scale against the appellant Raheja Corporation. Para 16 of the report is worthnoting. It reads:

Equally in para 19 of the said decision, the Bench noted clause 7 of the contract in that case between theparties which dealt with right to terminate the agreement and to dispose of the unit if a breach iscommitted by the purchaser. Noting this argument in para 19 of the report the following pertinentobservations were made:

19.Accordingly, the entire decision in K. Raheja case (supra) is confined to the applicability ofinclusive definition of works contract as defined under the Karnataka Act. In the absence ofsuch definition in the Karnataka statue, the result would have been entirely different as then, itwould have remained a contract between the builder on the one hand and employer on theother which could not have been treated as works contract as provided by the Constitutionprovisions aforesaid and as interpreted by the aforesaid three Constitution bench judgments ofthe Supreme Court. In my opinion, the clear observations which are the basis of decision inRaheja case (supra) are found in para 11 and 16 of the report which clearly indicate that thedecision is rendered solely on the basis of more comprehensive definition of works contractunder the KST Act, 1957.

20.It may be noted at this stage that as noted earlier, so far as Act, 2003 is concerned, when readwith the rules therein, there is no definition of works contract on the lines in which Karnatakalegislature has defined the term works contract. Consequently, connotation of word workscontract simplicitor as per constitution scheme and three Constitution bench judgments of the

Supreme Court will be applicable to govern any transaction between a builder who acts on hisown and ultimately gives possession of the construction portion to the prospective purchaser in


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the light of the Act, 2003. This conclusion is inevitable in the light of the aforesaid threeConstitutions bench judgments of the Supreme Court governing construction in the absence ofany special definition of works contract in the Act, 2003. Consequently, K. Rahejas case(supra) decision cannot be applied to the facts.

21. Further K. Rahejas case decision of the Supreme Court came up for consideration before

Allahabad High Court in the case of ASSOTECH REALTY PVT.LTD. v. STATE OF U. P.(2007) 8 VST 738. So far as this decision is concerned, it is of course true that Allahabad highCourt has distinguished the ratio of Raheja case (supra) of the Supreme Court on the basis ofpeculiar facts of the agreement between the parties which came up for consideration beforethe high Court. However, R.K.Agrawal, J. speaks for the Division bench in the said decisionhas referred to the definition of works contract under the U.P. Act which is reproduced in para15 of the report. The said definition of works contract in UP Act is found in section 2 (m) of thesaid 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

22.Now, a mere look on the said definition shows that the U.P. Act has also enacted a similarcomprehensive definition of works contract as was found in the Karnataka Act which resultedin decision in Raheja case (supra). However, despite that definition, the Division bench of theAllahabad High Court distinguished Raheja case (supra) of the Supreme Court in the light ofvarious clauses 3, 8, 19, 20 and 27 of the agreement between parties. The High Court hastaken the view that decision in K. Raheja case (supra) would not be applicable to the factsbefore them and consequently, the transaction in question cannot be treated as workscontract. However, the said decision of the Allahabad High Court at page 97 has laid down thatfrom a conjoint reading of clause (m) of section 2 and section 3F of the Act, it is seen that tobe a works contract under the act, the activities mentioned therein ought to have beenundertaken by means of an agreement, either implied or written, for cash, deferred payment orother valuable considerations. It was further observed that If the activity is being undertakenby a person for himself, then it would not be a works contract under the Act and consequently,

there will be no liability for payment of tax under section 3F of the Act. In my view, theaforesaid observations at page 97 may appear to be taking a contrary view as compared to thedecision of the Supreme Court in Raheja case, as noted earlier, Supreme court has clearly laiddown that it is a wide definition which includes any agreement for carrying out building orconstruction activity for cash, deferred payment or other valuable considerations. Thus, evenan owner of the property may also be said to be carrying on a works contract. However, it maybe seen that special clauses of the contract before the Allahabad High Court have been reliedupon for holding in favour of the assessee. It was held in para 21 that on reading of theaforesaid clauses, it was found that the transaction was not a works contract to be covered bythe network of U.P. Act. In my opinion, even apart from the aforesaid fact, the Division benchsview of the Allahabad High Court also can be treated as proceeding on its own facts in the lightof relevant clauses of the agreement considered by the Division bench. However, the decisionof the Supreme Court in Raheja case (supra) cannot be pressed in service for deciding themoot question of works contract as per Act, 2003 and the rules in the light of the Constitutionscheme regarding correct connotation of the word works contract as interpreted andunderstood by the three Constitution bench judgments of the Supreme Court and on thisground alone, the aforesaid decision in Raheja case cannot be effectively pressed in servicefor bringing charge under the Act, 2003.

23.In LARSEN & TOUBRO LTD. v. STATE OF KARNATAKA decided on August 19, 2008, casereported in (2008) 17 VST 460 SC, the question therein was whether the appellant, which wasengaged in property development involving construction and building of flats and subsequentsale of complete flats, would be liable to pay tax under the KST Act, 1957. The facts wereappellant had agreed to develop the plot owned by one person. There were two agreementsthe development agreement and the tripartite agreement. The tripartite agreement was

between the owner of the plot, the developer i.e. appellant, and the prospective buyer of theflat. The respondent relied upon the decision of K.RAHEJA reported in 141 STC 298 SC; AIR


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2005 SC 2350 and took the position that appellant had constructed the flats on behalf of theprospective buyers. According to them it was not the development agreement but the tripartiteagreement that was the works contract. The Court observed distinction between two kind ofcontracts, sale and works contract, which rest on the principle that a contract of sale is onewhose object is transfer of property in and delivery of possession of chattel to the buyer, whileas 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 then referred the matterfor reconsideration by larger bench placed it before the Honble Chief Justice for appropriatedirections as in view of the above decision if the view is accepted then there would be nodifference between works contract and chattel to chattel.

24.With regard to facts for the Gujarat State the decision of K. RAHEJA DEVELOPMENTCORPORATION LTD. v. STATE OF KARNATAKA reported in (2005) 141 STC 298; 2005 (5)SCC 162; AIR 2005 SC 2350, it cannot be held as good law as the enforceability has beennaturalised by the latter decision in LARSEN & TOUBRO LTD. v. STATE OF KARNATAKAdecided on August 19, 2008, case reported in (2008) 17 VST 460 SC. Under the constructionindustry, almost all dealings are generally made by single contract wherein the price offered isalways per square feet, which includes the cost of land. The prospective buyer of flats or

bungalows or raw house never enters into agreement for construction of property but they haveclear only and only intention to buy desired immovable property. They never engage architect,builder, labour, contract or sub contract, nor do they make any payment by bifurcation to anyagency by such break-up and keeps books of accounts.

25.In the backdrop of above, for levy of tax on construction activity the legal position itself hasgone in dispute so the liability cannot be fasten by relying upon the decision of K.RAHEJA.Counters of LARSEN & TOUBRO LTD. appears to be not only sound but its quite logical andreasons given therein are absolutely self convincing. Under the situation the HonbleGovernment should issue immediate instruction for restraining the officers for exercise ofpowers till the larger bench decide the issue? Assuming that, decision of K.RAHEJA is likely toheld then also for termination of membership and remember entry with ongoing work will

create litigation. Hence the effect of the decision in such circumstances should makeprospective so as not put dealer in adverse situation. From the two decisions above, it showthat how the controversy arose and circumstances lead the dealer not to deposit tax. Underthe highly controversy certainly most of the dealers will find that they have failed to admit thetax and deposit into Government treasury. In such circumstances when the law is in completedark it is very difficult to contribute tax by any one, this aspect needs to be taken into accountfor considering in absence of any kind of deliberate intention, guilty conduct and withoutconsidering reasonable cause penalty should not be imposed as the present law does not giveany immunity in interest and penalty. Proceeding against the existing registered dealer alsorequires to be stayed, and permission be granted to wriggle out from the scheme ofcomposition if applied.

HD Desai - Work Contract

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