Works contract taxation in flat construction upheld only for goods value, with land excluded from the VAT base.

Composite pre-completion construction agreements for flats were treated as works contracts, so VAT could be levied only on the value of goods transferred in execution and not on land or other immovable-property components. The valuation mechanism under the Haryana VAT law and rules was upheld only by reading it down to confine the levy to goods and permissible deductions, while excluding land. Sections governing joint liability of contractor and sub-contractor and the optional composition scheme were held valid. The writ petitions were maintainable despite alternative remedies because the challenge included vires issues, though individual factual disputes were left for the tax authorities.

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Issues: (i) Whether developers and builders, when entering into agreements to construct flats or units for prospective purchasers before completion, are engaged in works contracts and whether VAT can be levied on the transfer of property in goods involved in such activity; (ii) Whether the valuation mechanism in Explanation (i) to Section 2(1)(zg) of the Haryana Value Added Tax Act, 2003 and Rule 25(2) of the Haryana Value Added Tax Rules, 2003 is valid and whether it can be read down to exclude land and confine the levy to the value of goods transferred in the execution of the works contract; (iii) Whether Section 42 of the Haryana Value Added Tax Act, 2003 is valid; (iv) Whether Section 9 of the Haryana Value Added Tax Act, 2003 and Rule 49 of the Haryana Value Added Tax Rules, 2003 are valid in relation to the composition scheme; (v) Whether the writ petitions were barred by the availability of an alternative remedy.

Issue (i): Whether developers and builders, when entering into agreements to construct flats or units for prospective purchasers before completion, are engaged in works contracts and whether VAT can be levied on the transfer of property in goods involved in such activity.

Analysis: The constitutional scheme after Article 366(29A)(b) permits the State to tax the transfer of property in goods involved in the execution of a works contract. A composite building or construction agreement, where construction is undertaken for and on behalf of the purchaser before completion, falls within the ambit of a works contract. The levy is permissible only on the goods element and not on the transfer of immovable property. The taxable event is the transfer of property in goods at the stage of incorporation in the works, and the measure of tax is the value of such goods at that time.

Conclusion: Developers and builders executing pre-completion construction agreements are covered by works contract taxation, but VAT can be levied only on the value of goods involved in the execution of the contract and not on immovable property or land.

Issue (ii): Whether the valuation mechanism in Explanation (i) to Section 2(1)(zg) of the Haryana Value Added Tax Act, 2003 and Rule 25(2) of the Haryana Value Added Tax Rules, 2003 is valid and whether it can be read down to exclude land and confine the levy to the value of goods transferred in the execution of the works contract.

Analysis: Explanation (i) to Section 2(1)(zg) is a definitional provision and does not itself create a charging liability. Rule 25(2) provides the deductive mechanism for arriving at taxable turnover. To sustain validity, the provision must be construed so that only labour, service and other permissible deductions are excluded and the levy remains confined to the value of goods involved in the works contract. The rule cannot be applied to tax land or immovable property. The provision was therefore upheld by reading it down and the State was directed to bring the rules in line with the constitutional limitation and its own affidavit that land is not taxable.

Conclusion: The provision and rule are valid only when read down to exclude land and other immovable-property components and to restrict tax to the value of goods involved in the works contract.

Issue (iii): Whether Section 42 of the Haryana Value Added Tax Act, 2003 is valid.

Analysis: Section 42 creates joint and several liability between the contractor and sub-contractor, while also protecting the contractor where tax has already been paid by the sub-contractor and the assessment has attained finality. The provision is intended to safeguard revenue and does not impose an arbitrary or discriminatory burden. It is a machinery and safeguarding provision rather than a distinct unconstitutional levy.

Conclusion: Section 42 of the Haryana Value Added Tax Act, 2003 is valid.

Issue (iv): Whether Section 9 of the Haryana Value Added Tax Act, 2003 and Rule 49 of the Haryana Value Added Tax Rules, 2003 are valid in relation to the composition scheme.

Analysis: The composition or lump-sum scheme under Section 9 and Rule 49 is optional. A dealer who opts into the scheme does so for administrative convenience and associated benefits, and the method of computation cannot be impeached on that basis. The circular dated 10.2.2014, being referable to the optional composition regime, was not illegal.

Conclusion: Section 9 of the Haryana Value Added Tax Act, 2003 and Rule 49 of the Haryana Value Added Tax Rules, 2003 are valid.

Issue (v): Whether the writ petitions were barred by the availability of an alternative remedy.

Analysis: Although an alternative statutory remedy normally weighs against writ jurisdiction, the challenge here included the vires of statutory provisions and rules. That brought the case within the recognised exceptions to the alternative-remedy rule. Individual factual and assessment disputes were left open to be raised before the assessing or revisional authority.

Conclusion: The writ petitions were maintainable despite the availability of alternative remedies.

Final Conclusion: The challenge succeeded only to the extent that the valuation mechanism had to be confined to the goods element in the works contract and not to land or immovable property. The impugned assessment and revisional orders were set aside, fresh proceedings were permitted in accordance with the legal principles stated, and the writ petitions were partly allowed.

Ratio Decidendi: In a pre-completion composite construction agreement, the developer's activity is a works contract, and the State may levy VAT only on the value of goods involved in the execution of the contract at the time of incorporation, not on land or other immovable-property components.

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