2005 (5) TMI 7 - SC - VAT / Sales Tax

Agreements for construction constitute works contracts; parties liable for turnover tax on transfer of property in goods

K RAHEJA DEVELOPMENT CORPORATION Versus STATE OF KARNATAKA.

SC held the agreements constituted works contracts within the Karnataka Act and the appellants were liable to pay turnover tax on transfer of property in ... Service Tax - Activity of construction / development by a Builder - Work Contract - liability to pay turnover tax under the Karnataka Sales Tax Act - HELD THAT:- As has been rightly submitted by Mr. Hegde the definition of the term 'works contract' in the said Act is an inclusive definition. It does not include merely a works contract as normally understood. It is a wide definition which includes 'any agreement' for carrying out building or construction activity for cash, deferred payment or other valuable consideration. The definition does not make a distinction based on who carries on the construction activity. Thus even an owner of the property may also be said to be carrying on a works contract if he enters into an agreement to construct for cash, deferred payment or other valuable consideration. We, therefore, do not need to go into the question whether the Appellants are owners as even if the Appellants are owners to the extent that they have entered into Agreements to carry out construction activity on behalf of somebody else for cash, deferred payment or other valuable consideration, they would be carrying out a works contract and would become liable to pay turnover tax on the transfer of property in the goods involved in such works contract. No distinction between construction of residential flats or commercial units. Thus, a works contract, within the meaning of the term in the said Act, can also be for construction of commercial units. For the purposes of considering whether an agreement amounts to a works contract or not, the provisions of the Karnataka Ownership Flats (Regulation of Promotion of Construction, Sales, Management and Transfer) Act, 1974 will have no relevance. Thus the Appellants are undertaking to build as developers for the prospective purchaser. Such construction/development is to be on payment of a price in various installments set out in the Agreement. As the Appellants are not the owners they claim a 'lien' on the property. Of course, under clause 7 they have right to terminate the Agreement and to dispose off the unit if a breach is committed by the purchaser. However, merely having such a clause does not mean that the agreement ceases to be a works contract within the meaning of the term in the said Act. All that this means is 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 purchaser. Therefore, it remains a works contract within the meaning of the term as defined under the said Act. It must be clarified that if the agreement is entered into after the flat or unit is already constructed, then there would be no works contract. But so long as the agreement is entered into before the construction is complete it would be a works contract. The Appeal stands dismissed. Issues Involved:1. Whether the appellants are dealers liable to pay turnover tax under the Karnataka Sales Tax Act.2. Whether the agreements entered into by the appellants constitute works contracts under the Karnataka Sales Tax Act.3. Whether the appellants are considered owners of the property under the Transfer of Property Act.Issue-wise Detailed Analysis:1. Liability to Pay Turnover Tax:The primary question was whether the appellants, engaged in real estate development, are liable to pay turnover tax under the Karnataka Sales Tax Act. The appellants argued that there was no transfer of property in goods either by themselves or through any works contract, hence they showed nil liability in their tax returns. However, the Adjudicating Authority did not accept this contention and passed an Assessment Order claiming tax. The Additional Joint Commissioner of Commercial Taxes (Appeal) upheld this order, stating that tax was payable due to the transfer of property in goods pursuant to a works contract. The Karnataka Appellant Tribunal partly allowed the appeal, computing turnover only on the value of goods in the execution of the works contract. The High Court dismissed the Revision Petition, relying on the principles laid down in the case of M/s. Mittal Investment Corporation.2. Definition and Scope of Works Contracts:The appellants contended that their agreements with intended purchasers did not constitute works contracts. They argued that they were developing the property and selling flats or commercial complexes, not undertaking works contracts on behalf of the purchasers. The Court examined the definitions under the Karnataka Sales Tax Act, particularly Section 2(1)(k)(viii), which defines a dealer, and Section 2(1)(v-i), which defines a works contract. The Court noted that the definition of works contract is very broad, including any agreement for building or construction for cash, deferred payment, or other valuable consideration. The Court concluded that even if the appellants were owners, their agreements to construct buildings for valuable consideration constituted works contracts, making them liable to pay turnover tax on the transfer of property in goods involved in such contracts.3. Ownership under the Transfer of Property Act:The appellants argued that they became owners of the property by virtue of agreements with the landowners, despite the absence of formal conveyance. They cited Section 53A of the Transfer of Property Act and relied on judgments in C.I.T. vs. Podar Cement Ltd. and Mysore Minerals Ltd., where beneficial ownership was recognized under the Income Tax Act. The Court, however, distinguished these cases, noting that they were specific to the Income Tax Act. The Court emphasized that under the Karnataka Sales Tax Act, the appellants did not hold registered sale-deeds and thus were not considered owners. The agreements were deemed development agreements, with the landowners executing conveyances directly to the purchasers' society. The appellants only had a possessory interest and a right to construct, not ownership.Conclusion:The Court upheld the High Court's judgment, confirming that the appellants' activities constituted works contracts under the Karnataka Sales Tax Act, making them liable for turnover tax. The appeal was dismissed, and the observations in Mittal Investment Corporation's case that contradicted this view were not approved. The Court clarified that if agreements were entered into after construction was complete, they would not constitute works contracts. However, agreements made before construction completion were considered works contracts, subject to turnover tax. The appeal was dismissed with no order as to costs.