Sales Tax Review

February  2007

Important Trade Circulars

No. MIA-10-2007/Adm-5/4

Gentlemen /Sir /Madam, 

            The Supreme Court has delivered the judgment in the case of M/S. K. Raheja Development Corporation 141 STC 298 (S.C).  The judgment is based upon the provisions of Karnataka Sales Tax Act,1957, mainly clarifying the scope of the definition of ‘works contract’ contained in the Karnataka Sales Tax Act,1957. 

            The facts in that case were that the appellant, which carried on the business of real estate development and allied contracts, entered into development agreements with owners of lands.  It got the plans sanctioned, and after approval, constructed residential apartments and/or commercial complexes.  The agreement provided that on completion of the construction, the residential apartment or the commercial complex would be handed over to the purchasers, who would get an undivided interest in the land also.  The owner of the land would transfer the ownership of the land directly to a society which was being formed under the Karnatak Ownership Flats Act,1974.
 

            The question before the Supreme Court was “whether the appellant was a dealer and liable to pay turnover tax under the Karnataka Sales Tax Act,1957 in relation to the contracts with the purchasers as ‘works contracts’? 

2. The Supreme Court, relying upon the provisions of section 2(1)(v-i) of the Karnataka Sales Tax Act,1957, interpreted the definition of ‘works contract’ and has held that, the definition of ”‘works contract’ was very wide and was not restricted to a ‘works contract’ as commonly understood, viz., a contract to do some work on behalf of someone else.  It also included “any agreement for carrying out either for cash or for deferred payment or for any other valuable consideration, the building and construction of any moveable or immoveable property.  The definition took within its ambit any type of agreement wherein the construction of a building took place either for cash or deferred payment or valuable consideration.  Though the applicant was not the owner, it claimed a lien on the property and it had the right to terminate the agreement on account of any breach of the agreement by the purchaser.  So long as there was no breach of the agreement, the construction was for and on behalf of the purchaser and the agreement  remained a works contract.”

Following the judgment of the Supreme Court, the Government of Maharashtra, has amended the definition of ‘sale’  as per section 2(24) of the Maharashtra Value Added Tax Act, 2002 by Ordinance No. VI of 2006 dt. 20^th June,2006 and amended the definition of ‘sale’ to bring it on par with the provisions of the Karnataka Sales Tax Act and has thus expanded the concept of sale to include, 

“the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, namely, an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.”

The Ordinance No. VI of 2006 is now converted into an Act by Act No. XXXII of 2006 with effect from 5th August, 2006.

3. Following the amendment, a Trade Circular No. 23T of 2006 dt. 11/09/2006 was issued.  It is mentioned in the circular that in view of the amended definition of ‘sale’, under MVAT Act,2002, the Supreme Court Judgment in the case of M/s. K. Raheja Development Corporation’s case will now be applicable to the proceedings under the Maharashtra Value Added Tax Act,2002.  It is further mentioned in the circular that, “as regards to  the scope of the amendment and applicability of the judgment, a separate Trade Circular will be issued regarding the import of this amendment and of the judgment.”  This Trade Circular is, therefore, issued to clarify certain important aspects. 

1. The applicability of the Supreme Court judgment to the proceedings under the Maharashtra Value Added Tax Act,2002 will be  from the date of issue of the Ordinance, i.e., from 20^th June,2006.  It means, any transfer of property after 20^th June,2006 irrespective of whether an agreement was signed prior to 20/06/2006 or otherwise will now be governed by amended definition of ‘sale’ under the Maharashtra Value Added Tax Act,2002. 

2. Certain queries are received from the trade as to whether the tri-partite arrangement entered into between the landowners, developers and the prospective buyers would get covered by this amendment.  In this respect, attention is invited to Para No. 16 of the Supreme Court Judgment wherein the Court has observed that,-

“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.”   

In view of the above observations of the Supreme Court, the tripartite arrangements would also get covered by the scope of this amendment.

3. Certain queries have also been raised to this office in view of the determination by Addl.Commissioner of Sales Tax, Maharashtra State, Mumbai in the case of M/s. Rehab Housing Pvt Ltd, DDQ Order dt. 28/06/2004 wherein the contract for the construction of tenements alongwith the land is not treated as ‘works contract’.

The said determination was given on interpretation of the provisions of the earlier Works Contract Act.  In view of the Supreme Court judgment and the  amended definition of ‘sale’ under the Mahrashtra Value Added Tax Act,2002 and the observations of the Supreme  Court in the case of M/s. K. Raheja Development Corporation’s case, the said DDQ will have no applicability for subsisting contracts and contracts entered into on or after the 20^th June,2006..

4. The Supreme Court in the M/s. K. Raheja Developments case has further observed 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 agreement is entered into before the construction is complete, it would be a Works Contract.”  Thus, whether any agreement is entered into prior to completion of construction or after the completion of constructed unit will  depends upon the terms of the agreement.
    

5. This circular cannot be made use of for legal interpretation of provisions of law, as it is clarificatory in nature.  If any member of the trade has any doubt, he may refer the matter to this office for further clarification.
    

6. You are requested to bring the contents of this circular to the notice of all the members of your association.

Yours faithfully, 

(B.C. Khatua)
Commissioner of Sales Tax,
Maharashtra State, Mumbai.