TaxTMI 
TaxTMI 
2026 (4) TMI 1653
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....ion No. 2 Of 2022. - -<br>CST, VAT & Sales Tax<br>HON'BLE MR. JUSTICE S.G. PANDIT AND HON'BLE MR. JUSTICE K. V. ARAVIND The State of Karnataka, The Additional Commissioner of Commercial Taxes (Zone)-1, Department of Commercial Taxes, Government of Karnataka, The Assistant Commissioner of Commercial Taxes (Audit)-1.1 Bengaluru, The Under Secretary Finance Department (C.T-1), Karnataka, M/s. H.M. Infratech Pvt. Ltd., M/s. Sterling Developers Private Limited, The Joint Commissioner Of Commercial Taxes (Appeals)-4, Shanthinagar Bengaluru Versus M/s. Vaswani Estates Developers Private Limited, M/s. Fortious Infra Developer LLP., The Additional Commissioner of Commercial Taxes (Zone) - 1 Bangalore, M/s. Golden Gate Properties Limited, Bren Corporation, (Previously Known As Sjr Enterprises), M/s. Sai Radha Developers (R), Villaland Developers Private Limited, M/s. Astro Builders & Developers, M/s. Elegant Properties, M/s. Keerthi Estates Pvt Limited, M/s. Purvankara Projects Limited, M/s. Manito Builders, Ashwini Builders, Purvankara Projects Limited, M/s. Nermitee Constructions, M/s. Sumon Associates, Sri H. S. Harikrishna, Proprietor, M/s. Gaana Builders And Developers, M/s. ....
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....thority amounts to levy of VAT on immovable property/land, which the State Legislature lacks the power to tax under Entry 54 of List II of the Seventh Schedule of the Constitution of India? 4. Without prejudice, assuming but without admitting that the transaction is indeed a works contract, whether in the absence of a method to value the goods incorporated in the works contract under the KVAT Act and the Rules, the charge fails? 5. Whether under the composition scheme any deductions not contemplated by the statute are permissible?" For the sake of convenience, facts of STRP. No. 181/2018 are referred to. 4. The petitioner namely, M/s. Vaswani Estate Developer (P) Ltd., (developer) is a private limited company engaged in the business of development, construction, execution of works contracts for residential apartments and sale thereof. 5. A proposition notice under Section 39(1) of KVAT Act dated 01.06.2010 was issued by the Adjudicating Authority proposing reassessment on the ground that the total and taxable turnover, pertaining to the value of goods used in the execution of works contracts and the value of goods relating to the land owners' share of fla....
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....undivided right in the land in favour of the builder or its nominee/agent is for consideration, as the land owner, for the said transfer of land would receive proportionate built-up area which shall be the consideration. Therefore, it is submitted that land cost forms part of the turnover and the dealer cannot seek deduction of the said land cost. 8. Learned Additional Government Advocate further submits that the dealer having opted for the composition scheme is liable to pay tax by way of a fixed composition amount in lieu of regular tax, without claiming any deductions, except the deductions expressly permitted under Sub-Section (5) of Section 15 of the KVAT Act, which would not include deduction towards the cost of land. 9. Learned Additional Government Advocate would submit that it is an admitted fact that JDA exists between dealer/developer and the land owner. It is further submitted that the developer has executed works contract for the land owner by transferring goods in the course of construction of apartments, and as consideration land owner through General Power of Attorney (GPA) has authorized developer to receive the consideration from the flat buyers by way of sa....
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....s an agreement for the sale of immovable property and not for execution of a works contract. Further, learned senior counsel would submit that the transaction between the developer and land owner at the best could be considered as barter or exchange but not a sale. It is submitted that the word "supply" under the provisions of the Goods and Services Act, 2017 (for short, 'GST Act') expressly includes transactions by way of barter and exchange. To consider it as a sale, there is no monetary consideration. Again referring to Section 2(29) of the KVAT Act and the words "other valuable consideration" appearing in the said Section, submits that it is to be understood in the context of monetary payments and cannot include transactions in the nature of exchange or barter and in that regard, reliance is placed on the decisions in DEVI DASS GOPAL KRISHNAN VS. STATE OF PUNJAB (1967) 20 STC 430 and SALE TAX COMMISSIONER, W.P., VS. RAM KUMAR AGARWAL (1967) 19 STC 400. 12. Learned senior counsel would also question the competence of the State to levy the tax on land by submitting that it is beyond the State's power as conferred under Entry 54 of List-II of the Seventh Schedule to the C....
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.... (a) a transfer otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration; (b) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (c) a delivery of goods on hire purchase or any system of payment by installments; (d) a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. Explanations.- (1) A transfer of property involved in the sale or distribution of goods by a society (including a co-operative society), club, firm, or any association to its members, for cash, or for deferred payment or other valuable consideration, whether or not in the course of business, shall be deemed to be a sale for the purposes of this Act. (2) Every transaction of sale by way of or as a part of any service or in any other manner whatsoever, of goods, being food or any other article of human consumption or any drink (whether or not intoxicating) where such sale or service is for cash, deferred payment or other valuable co....
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....r commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India and the value of goods transferred or despatched outside the State otherwise than by way of sale. Section 2(36) of the KVAT Act (36) 'Turnover' means the aggregate amount for which goods are sold or distributed or delivered or otherwise disposed of in any of the ways referred to in clause (29) by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration, and includes the aggregate amount for which goods are purchased from a person not registered under the Act and the value of goods transferred or despatched outside the State otherwise than by way of sale, and subject to such conditions and restrictions as may be prescribed the amount for which goods are sold shall include any sums charged for anything done by the dealer in respect of the goods sold at the time of or before the delivery thereof. Explanation. - The value of the goods transferred or despatched outside the State otherwise than by way of sale, s....
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....tools used in the execution of a works contract, charges for planning, designing and architects' fees, cost of consumables used in the execution of the works contract, cost of establishment to the extent relatable to supply of labour and services and other similar expenses relatable to supply of labour and services. Explanation III: For the purpose of clause (1), gross profit earned by a dealer shall be apportionable to the value of the goods and labour and other like charges involved in the execution of a works contract in the same ratio as in the total turnover. Explanation IV. - The deduction under clauses (d) and (3) shall be allowed in the return to be furnished for the tax period in which the goods are Returned by the purchasers or the dealer as the case may be. Article 366(29A) (b) of Constitution of India (29A) "tax on the sale or purchase of goods" includes-- (a) XXX (b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;" 17. It would also be necessary to take note of the relevant Clauses of the JDA to properly apply the provisions of law and also....
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....ees 65% of the undivided right, title and interest of the schedule property and the developer as consideration has agreed to construct and deliver to the owners 35% of the salable super built-up area, together with 35% of the car parking spaces for the absolute use, benefit and ownership of the landlord/owner. Regarding Question of Law No. 1: 19. In terms of Section 2(29) of the KVAT Act, 'sale' would mean transfer of property in goods by one person to another in the course of trade or business for cash, deferred payment or other valuable consideration and includes the transfer of property in goods involved in the execution of a works contract. 'Works contract' in terms of Section 2(37) of the KVAT Act includes any agreement for carrying out, for cash deferred payment or other valuable consideration, the building, the construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property. In the light of the above, the question is, whether there exists a works contract under the JDA and if so, whether the same would amount to a sale within the meaning of the KVAT Act? ....
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....d not be owners as admittedly they do not have any registered sale deeds in their hand. The agreement relied upon by Mr Mehta between the appellants and the owners of the land is nothing but a development agreement. Pursuant to such an agreement, plan would be got sanctioned in the name of the owner of the property. It would be the owner of the property who would then execute a conveyance directly to the society of purchasers. All that the appellants have is a possessory interest and a right to construct. Such rights do not constitute the person as an owner of the property. 19. To consider whether the appellants are executing works contract one needs to look at a typical agreement entered into with the purchaser. The relevant clauses are clauses (q), (r) of the recitals and clauses 1, 5(c) and 7, which read as follows: "(q)(i) Construction of the said multi-storeyed building. (ii) Sale of the units in the aforesaid multi-storeyed building to different persons in whose favour ultimately a deed of conveyance would be obtained by the holders, directly from the vendors, of an undivided fractional interest in the said land (i.e. the area of 5910.17 sq meters d....
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.... build for and as unit/s to belong to 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 of Rs 5,07,000 (Rupees five lakhs seven thousand only) to be paid by the prospective purchaser to the developers at the time and in the manner set out in clause 3 hereof. The said premises shall have the amenities set out in the Fourth Schedule hereunder written: *** 5. The under mentioned terms and provisions are express conditions to be observed, performed and fulfilled by the prospective purchaser, on the basis of which this agreement has been entered into by the holders/developers and the due and proper fulfilment whereof are to be conditions precedent to any title being created and/or being capable of being documented by the prospective purchaser in the aforesaid fractional interest in the land described in the First Schedule hereunder written and/or in the said premises: (a)-(b)*** (c) The overall control and management of the project and the development and completion of the said building shall be with the developers and furthermore the de....
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....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 the 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." 21. Taking note of the principles laid down by the Hon'ble Apex Court in the above decision, if the developer undertakes construction for a prospective purchaser for consideration, such an agreement would constitute a works contract. But, the aforesaid view was doubted by the Hon'ble Apex Court in the case of Larsen and Toubro Limited Vs. State of Karnataka (2008) 17 SCC 199 and the matter was referred to a Lar....
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....ch 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 Corpn. case [(2005) 5 SCC 162] because para 20 does assist the Department. However, we are of the view that if the ratio of Raheja Development case [(2005) 5 SCC 162] is to be accepted then there would be no difference between a works contract and a contract for sale of chattel as a chattel. 12. Lastly, could it be said that the 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 (sic payment) or any other valuable consideration. According to the Department, the development agreement is not a works contract but the tripartite agreement is a works contract which, prima facie, appears to be fallacious. There is no allegation that the tripartite agreement is sham or bogus." 22. The Larger Bench of the Hon'ble Apex Court in LARSEN AND TOUBRO LIMITED AND ANOTHER VS. STATE OF KARNAT....
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....rgument on behalf of the developers that the flat purchaser is entitled to transfer of flat and conveyance of fraction of land only when all instalments have been fully paid and that shows that the agreement between the developer and the flat purchaser is the sale of flat and not to appoint the developer as the contractor of the flat purchaser for the purposes of carrying out the construction of the flat for and on behalf of the flat purchaser has no merit. The submission overlooks the typical nature of the development agreement which is followed by a tripartite agreement between the owner of the land, the developer and the flat purchaser. Effectively and de facto it is the developer who constructs the building for the flat purchaser. The developer does so for monetary consideration. The label of payment is not decisive but the factum of the payment is. The construction is done on payment of price as agreed upon between the developer and the flat purchaser. It is not necessary to recapitulate all clauses of the agreement under KOFA or for that matter under MOFA. Raheja Development [K. Raheja Development Corpn. v. State of Karnataka, (2005) 5 SCC 162] takes note of relevant....
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....orks contract only from the stage the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government." On a careful reading of the above decision, it can be gathered that a development agreement between the land owner and the developer may not necessarily involve direct monetary consideration, unless it is a tripartite agreement between the land owner, the developer and the flat purchaser, wherein the developer undertakes construction for the flat purchaser for monetary consideration, then the transaction assumes the character of a composite contract comprising both a works contract and a transfer of immovable property. It is further held that, the activity of construction undertaken by the developer would constitute a works contract only from the stage at which the developer enters into a contract with the flat purchaser. In the light of the above decisions of the Hon'ble Apex Court, the questions of law raised requires to be considered. 23. We do not find any error with the finding of the Tribunal that the JDA....
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....ly to the construction activity undertaken by the developer pursuant to agreements entered into with the flat purchasers. Therefore, the JDA between the land owner and the developer is a composite contract comprising both works contract and a transfer of immovable property, and that sales tax may be levied on the value of materials involved in the execution of the works contract, subject to the decision of the Larger Bench of the Hon'ble Apex Court in LARSEN AND TOUBRO LIMITED (supra) i.e., the activity of construction undertaken by the developer would constitute a works contract only from the stage at which the developer enters into a contract with the flat purchaser. Therefore, the construction undertaken in respect of a land owner's share under the JDA would not amount to a works contract. 28. Accordingly, question of law No. 1 is answered in favour of the assessee and against the Revenue. Regarding Question of Law No. 2: 29. Answer to question of law No. 1 would almost cover or answer the present question. In terms of the Larger Bench decision of the Hon'ble Apex Court in LARSEN AND TOUBRO LIMITED (supra), to sustain the levy of tax on goods deemed to have been....
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....definition of 'sale' in terms of Section 2(29) of the KVAT Act, the Allahabad High Court considering the same expression has held that where no price is paid, the transaction is one of exchange or barter. Applying the Rule of ejusdem generis, it is held that "other valuable consideration" would take color from monetary modes such as payment by cheque, bills of exchange or similar negotiable instruments. The Hon'ble Apex Court in DHAMPUR SUGAR MILLS LIMITED., VS. COMMISSIONER OF TRADE TAX, U.P. (2006) 5 SCC 624 had an occasion to consider the word 'sale' while dealing with Clause 29A of Article 366 of the Constitution of India and the observation made at paragraph 20 reads as follows: "20. It is inconceivable in law that a licence fee can be a subject-matter of barter or exchange. A barter or exchange indisputably is distinct and different from a sale. A contract of sale denotes a transfer of property in goods by mutual consent. Such a transfer of ownership must be in relation to transfer from one person to another. The consideration would be a price in the form of money. Only when the consideration for transfer consists of other goods, it may be an exchange or....
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....ich the developer enters into a contract with the flat purchaser, and only the value addition to the goods transferred after such stage can be subjected to tax by the State. 36. In the light of the findings recorded herein, since the subject matter of the Joint Development Agreement is the transfer of immovable property, any levy of tax thereon would fall outside the legislative competence of the State. 37. Accordingly, the question of law No. 3 is answered in favour of the Assessee and against the Revenue. Regarding Question of Law No. 4: 38. This issue arises in the light of Circular No. 121/2009-10 dated 07.12.2009, which mandates the Assessing Authority, in cases involving Joint Development Agreements (JDA) to include the value of land relatable to the developer's share in the taxable turnover, on the premises that towards the cost of construction of the land owner's share of the built-up area the developer receives from the flat purchasers the value attributable to the undivided share of land. It further prescribes three different methods to ascertain the value of such undivided share recovered by the developer. Likewise, for determining the amount payable by the l....
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....thority to arbitrarily impose or assess tax. In the absence of machinery and procedure to be followed for assessment, such machinery provisions cannot be introduced by way of circulars, unless the Act enables such prescription. 41. The Punjab & Haryana High Court in DHINGRA JARDINE INFRASTRUCTURE (P.) LTD. V. STATE OF HARYANA (supra) has emphasised the necessity of a proper statutory mechanism for levy and computation of tax. The Court considered and answered the following question: "(7) Whether levy of tax on builders can be sustained in the absence of machinery provisions? The period being up to 16.05.2020 and thereafter, when the Rules were framed." After analysing the various statutory provisions and the judgments of the High Courts and the Hon'ble Supreme Court, the aforesaid question was answered by holding that, in the absence of a machinery provision specifying the details for computation, though the levy per se may not be in dispute, it would nevertheless be unenforceable. It was further held that unless the statute or rules provide for the manner of calculation of taxable turnover, the levy cannot be enforced. 42. It is settled position of law that a cir....
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....f transfer of immovable property and works contract. However, the construction activity would constitute a works contract only from the stage at which the developer enters into agreements with the flat purchasers. (ii) The construction undertaken by the developer in respect of the landowner's share under the JDA does not amount to a works contract, as there is no monetary consideration and the transaction is in the nature of barter or exchange, falling outside the scope of "sale" under Section 2(29) of the KVAT Act. (iii) The levy of tax under the KVAT Act is confined to the value of goods involved in the execution of a works contract. Such levy can be sustained only in respect of the value addition to goods transferred pursuant to agreements entered into with flat purchasers, and not on the transfer of immovable property. (iv) The Circular No. 12/2009-10 dated 07.12.2009, in so far as it seeks to introduce a mechanism for valuation and to include the value of land in the taxable turnover, lacks statutory backing and cannot override or supplement the provisions of the Act. Consequently, it is not binding on the assessees. (v) In the absence of a ....