Case Summary
Full Case Details
- Does the two-Judge Bench decision of this Court in Raheja Development[1] lay down
the correct legal position? It is to consider this question that in Larsen and Toubro[2] a two-Judge
Bench of this Court has referred the matter for consideration by the larger Bench. In the referral
order dated 19.8.2008, the two-Judge Bench after noticing the relevant provisions of the
Karnataka Sales Tax Act, 1957 and the distinction between a contract of sale and a works
contract made the reference to the larger Bench by observing as follows :
“We have prima facie some difficulty in accepting the proposition laid down in Para 20
quoted above. Firstly, in our view, prima facie, M/s Larsen & Toubro – petitioner herein, being a
developer had undertaken the contract to develop the property of Dinesh Ranka. Secondly, the
Show Cause Notice proceeds only on the basis that Tripartite Agreement is the works contract.
Thirdly, in the Show Cause Notice there is no allegation made by the Department that there is
monetary consideration involved in the first contract which is the Development Agreement.
Be that as it may, apart from the disputes in hand, the point which we have to examine is
whether the ratio of the judgment of the Division Bench in the case of Raheja Development
Corporation (supra) as enunciated in Para 20, is correct. If the Development Agreement is not a
works contract could the Department rely upon the second contract, which 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 Corporation(supra) case
because para 20 does assist the Department. However, we are of the view that if the ratio of
Raheja Development case is to be accepted then there would be no difference between works
contract and a contract for sale of chattel as a chattel. Lastly, could it be said that 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 (sic.) for cash, deferred or any other valuable consideration.
According to the Department, Development Agreement is not works contract but the Tripartite
Agreement is works contract which, prima facie, appears to be fallacious. There is no allegation
that the Tripartite Agreement is sham or bogus.
For the aforestated reasons, we direct the Office to place this matter before the Hon’ble
Chief Justice for appropriate directions in this regard, as we are of the view that the judgment of
Division Bench in the case of Raheja Development (supra) needs re-consideration by the larger
Bench.” - Of the 26 appeals under consideration before us, 14 are from Karnataka and 12 from
Maharashtra. Insofar as Karnataka appeals are concerned, it is appropriate that we take the facts
from the leading case being Larsen and Toubro.The ECC division of Larsen and Toubro (for
short, “L&T”) is engaged in property development along with the owners of vacant sites. On
19.10.1995, L&T entered into a development agreement with Dinesh Ranka, owner of the land
bearing survey numbers 90/1, 91, 92 (Part), 94, 95 and 96/1 (Part) together measuring 34 acres
all situated at Kothanur Village, Begur Hobli, Bangalore South Taluk, Bangalore, for
construction of a multi-storeyed apartment complex. The owner was to contribute his land
and L&T was to construct the apartment complex. After development, 25% of the total space
was to belong to the owner and 75% to L&T. A power of attorney was executed by the
owner of the land in favour of L&T to enable it to negotiate and book orders from
the prospective purchasers for allotment of built up area. Accordingly, L&T entered into
agreements of sale with intended purchasers. The agreements provided that on
completion of the construction, the apartments would be handed over to the
purchasers who will get an undivided interest in the land also. Sale deeds, thus, were
executed in favour of the intended purchasers by L&T and the owner.
- On 12.07.2005, the business premises of L&T were inspected by the Deputy
Commissioner of Commercial Taxes (Intelligence-1) South Zone, Koramangala, Bangalore
(hereinafter referred to as the ‘Deputy Commissioner’) and a detailed statement of the
Finance Manager was recorded. - On 21.12.2005, the Deputy Commissioner called upon L&T to furnish the details of
development project. L&T furnished details on 24.07.2005 and 26.09.2005. - On 04.10.2005, the Deputy Commissioner served a show cause notice on L&T
stating that it was liable to tax as per the decision of this Court in Raheja Development1.
L&T responded to the show cause notice and submitted preliminary objections on
10.10.2005. By a further communication dated 10.11.2005, L&T objected to the assessment
of tax for development of projects by it. The L&T inter alia submitted that the
development agreement was not a works contract per se on account of the reasons: (a) the
agreement was to develop and market flats to customers; (b) the intent and purpose of the
agreement was to develop property by the petitioners on the one hand and the land owner
on the other; (c) the construction and development of the said land involved no
monetary consideration; and (d) the only consideration was that upon the completion of the
entire project, L&T would be entitled to 75 per cent of the same. - Again on 04.01.2006, the business premises of L&T were inspected and certain
documents like agreement copies and other documents relating to the transactions of the
sale of flats were seized for the purposes of further investigation and verification. - On 02.02.2006, the Deputy Commissioner served upon L&T a further notice proposing
to tax the sale of materials used in the construction of flats on the ground that it was
entitled to 75 per cent of the share of the projects. L&T filed detailed objections to this notice as
well.
- On 03.07.2006, the Deputy Commissioner issued provisional assessment orders under
Section 28(6) of the Karnataka Sales Tax Act, 1957 (for short, ‘KST Act’) for the years
2000-01 to 2004-05. Along with the provisional orders, the Deputy Commissioner also
issued demand notices raising a total demand of Rs. 3,99,28,636/-. - Initially, L&T preferred a writ petition before this Court challenging the above
demands but that writ petition was withdrawn and a writ petition under Article 226 of the
Constitution of India was filed before the Karnataka High Court. - The Single Judge of the Karnataka High Court noted that the controversy raised by the
L&T was covered by the decision of this Court in Raheja Development and, accordingly,
dismissed the writ petition on 10.07.2007 by observing as follows:
“From the aforesaid observations of the Apex Court it is very much clear that as the petitioner
No. 1 had entered into an agreement to carry out construction activity on behalf of
someone else for cash or for deferred payment or for any other valuable construction, it
would be carrying out works contract and therefore would become liable to pay turnover tax
on the transfer involved in such work contracts. It is also not in dispute in this matter that the
agreement of sale is entered into between the first petitioner and the buyers of the flat even
prior to completion of the construction of the building. Under such circumstances, as
has been held by the Apex Court in the RAHEJA DEVELOPMENT
CORPORATION’s Case, the petitioners are liable to pay the turnover tax on the transfer of
goods involved in such ‘works contract’. In view of the dictum laid down by the recent
judgment cited supra, this Court does not find any merit in this writ petition.” - L&T preferred an intra-court appeal. The Division Bench of that Court concurred
with the Single Judge and dismissed the writ appeal by expressing its opinion as follows:
“In our view, so far as the definition of ‘work contract’ in almost similar situation as in the
present case has been well considered by the Hon’ble Supreme Court in the case of K.
RAHEJA DEVELOPMENT CORPORATION(supra).The question as to whether that
judgment as per Article 141 of the Constitution of India is the law of the land binding on all
the Courts in the Country. Prima facie, we find that the facts and circumstances in that case
are almost similar to the present case and as such, the ratio laid down in the
RAHEJA’s Case and relied upon by the learned Single Judge is, in our view, just and
proper. So far as the other pronouncements are concerned, if the appellant feels that it is
necessary to get the pronouncement in RAHEJA’s Case reviewed, it is open for him to
approach the Apex Court and this Court cannot substitute its own findings on the questions since
the same has already been decided by the Apex Court in RAHEJA’s case.”
17.Mr. Rohinton F. Nariman, learned senior counsel for L&T led the arguments on behalf of
the appellants. His submission is that Raheja Development does not lay down correct law. He
submits that insertion of clause 29-A (b) in Article 366 following the 61st Law Commission
Report is intended to separate the goods component from the labour and services component
of a composite works contract. The amendment does not in any manner undo Gannon
Dunkerley-I3 insofar as that decision defines what a works contract is. In this regard, learned
senior counsel extensively referred to the decisions of this Court in Builders’ Association4 and
Bharat Sanchar5. It is argued by him that in Raheja Development1 it was
incorrectly assumed that the definition of works contract was wide although the definition of
works contract in KST Act and Madras General Sales Tax Act which was under consideration in
Gannon Dunkerley-I3 was identical.
- Alternatively, it is argued by Mr. Rohinton F. Nariman that if it is accepted that the
definition of ‘works contract’ in KST Act is wide which takes within its fold the contracts
that are not commonly understood as works contract then this would be outside Entry 54
List II of the Seventh Schedule of the Constitution for the reason that “works contract”
as understood in Gannon Dunkerley-I3 has not in any manner been upset by the constitutional
amendment and would have to mean “works contract” as commonly understood. - Criticizing the conclusions drawn in paragraph 20 of the judgment in Raheja
Development1, it is argued by Mr. Rohinton F. Nariman that these conclusions are incorrect
for, (a) the well known tests to determine as to whether a particular contract is a
“works contract” or “contract of sale” have not been adverted to; (b) the contract is not read as
a whole. Its substance and the main object has not been looked at and one phrase is torn out of
context without adverting to any other part of the contract and based on this reasoning the
contract is said to be a works contract; (c) though it is noticed that construction/development
is to be on payment of a price in various installments but does not draw any
conclusion from it; (d) it is noticed that developer has a lien on the property but incorrectly states
that the lien is because they are not owners. The lien is obviously so that if monies are not
recovered from the prospective flat purchasers, the lien can be exercised, showing thereby that
the contract is a contract of an agreement to sell immovable property; (e) after noticing that
developer can terminate the agreement if any one installment is not paid and can forfeit
10% of the amount that has been paid and can ultimately resell the flat, it is held that the
presence of such a clause does not mean that the agreement ceases to be a “works
contract” without appreciating that such a clause would have no place in a works contract
and can only be consistent with the contract for the sale of immovable property inasmuch
as termination can take place if the entire consideration for the immovable property is not
paid; (f) it is stated that if there is termination but there is no re-sale, there would be no
works contract only to that extent which is again wholly incorrect because post termination
what happens to a particular flat is of no relevance inasmuch as the prospective flat
purchaser goes out of the picture; and (g) the distinction between a flat being constructed
and a flat under construction is a distinction without a difference for the reason that the
judgment notices that if the agreement is entered into after the flat is already constructed,
there would be no ‘sale’ and no ‘works contract’. This is obviously for the reason that the flat
has already been developed by the developer using his material and his plan and is sold as such to
a purchaser.
- Based on the various clauses of the tripartite agreement, it is argued that the main object
of the agreement read as a whole and the substance of the agreement is to sell and
convey fraction of the land together with a fully constructed flat only when all installments
have been fully paid. The work undertaken is for the joint development of the project as a
whole, i.e., work is undertaken by the developer for himself and for the owner. The
construction is not carried out for and on behalf of the purchaser, but it is carried out
entirely by the owner/developer in order to exploit or get the best price for the land and the
structure built thereon from various flat purchasers. The flat is to be sold as a flat and not an
aggregate of its component parts. No work is carried out for the purchaser who gets title to the
property only after all work is complete. Learned senior counsel argued that the ultimate test
would be: if a suit for specific performance is filed by the flat purchaser against the
owner/developer, such suit would invariably be for the conveyance of title and not for the
construction of a building. Conversely a suit by an owner/developer against the flat
purchaser would be for payment of consideration of a flat/fractional interest in the land. Such
suit would never be for payment of work done at the behest of the flat purchaser and
payment of consideration therefor. It is, thus, submitted that the judgment in Raheja
Development1 does not lay down good law and deserves to be overruled. - In the counter arguments advanced on behalf of the two States – Karnataka and
Maharashtra – Raheja Development1 has been stoutly defended. Mr. K.N. Bhat, learned
senior counsel for Karnataka submits that view taken in Raheja Development
1 is correct and
needs no reconsideration – both on merits as well as on the basis of binding
precedents on the principles governing reconsideration of an earlier decision. He
submits that Article 366(29-A) uses the phraseology employed in Entry 54 of List II
that reads, “taxes on sale or purchase of goods ….” For the purpose of Entry 54 List II,
“taxes on the sale or purchase of goods” includes “tax on the transfer of property in
goods (whether as goods or in some other form) involved in the execution of works
contract”. Transfer of property in goods is the essence of definition of ‘sale’ in Section 4 of
the Sale of Goods Act. Article 366(29-A)(b) can be rephrased as “a tax on the sale of goods
involved in the execution of a works contract” and in any case by the deeming fiction
incorporated in the above provision, it shall be deemed to be a sale of those goods by the
person making the transfer and a purchase by a person to whom such transfer is made. The
taxable event is the deemed sale of goods involved in the execution of works contract. Article
366 (29-A) has been inserted to remedy the situation arising from the decision in the Gannon
Dunkerley-I where attempt to levy sales tax on the sale of goods involved in the
execution of works contract was held to be unconstitutional. This was on the basis that a
works contract could not be dissected into contract for “works and services” and contract
for “sale of goods”. Mr. K.N. Bhat submits, relying upon para 41 in Builders’
Association, that definition of ‘works contract’ KST Act does not go beyond what is
contemplated in the Constitution.
- Prior to Forty-sixth Amendment in the Constitution, levy of sales tax on the sale of
goods involved in the execution of the works contract was held to be unconstitutional in
Gannon Dunkerley-I3. That was a case where the assessee (Gannon Dunkerley) was carrying on
business as engineers and contractors. Its business consisted mainly of execution of contracts for
construction of buildings, bridges, dams, roads and structural contracts of all kinds. During
the assessment year under consideration, the return filed by the assessee showed as many as
47 contracts most of which were building contracts which were executed by it. From the total
of the amount which the assessee received in respect of sanitary contracts and other
contracts 20 per cent and 30 per cent respectively were deducted for labour and the
balance was taken as the turnover of the assessee for the assessment year in question. Sales
tax was levied on the said balance treating it as taxable turnover under the Madras General
Sales Tax Act, 1939. Assessee questioned the levy of sales tax on the ground that there
was no sale of goods as understood in India and, therefore, no sales tax could be levied
on any portion of the amount which was received by the assessee from the persons for whose
benefit it had constructed buildings. The Madras High Court concluded that the
transactions in question were not contracts for sale of goods as defined under the provisions
of the Sale of Goods Act, 1930 which was in force on the date on which the Constitution
came into force and, therefore, the assessee was not liable to pay sales tax on the amounts
received by it from the persons for whom it had constructed buildings during the year of
assessment. It is from this judgment that the matter reached this Court. The Constitution
Bench of this Court held that in a building contract where the agreement between the
parties was that the contractor should construct the building according to the
specifications contained in the agreement and in consideration received payment as
provided therein, there was neither a contract to sell the materials used in the construction nor
the property passed therein as movables. It was held that in a building contract which was one
(entire and indivisible) there was no sale of goods and it was not within the competence of the
Provincial State Legislature to impose tax on the supply of the materials used in such a contract
treating it as a sale. The Constitution Bench said, “……..when the work to be executed
is, as in the present case, a house, the construction imbedded on the land becomes an accretion
to it on the principle quicquid plantatur solo, solo cedit, and it vests in the other party not as a
result of the contract but as the owner of the land. Vide Hudson on Building Contracts, 7th Edn.,
p. 386………” It was further stated, “…..that exception does not apply to buildings which
are constructed in execution of a works contract, and the law with reference to them is that the
title to the same passes to the owner of the land as an accretion thereto. Accordingly, there can
be no question of title to the materials passing as movables in favour of the other party to the
contract…….”
- In Gannon Dunkerley-I3, this Court held that in a building contract which was one,
entirely indivisible, there was no sale of goods and it was not within the competence of the
provincial State legislature to impose tax on the supply of materials used in such a contract
treating it as a sale. The above statement was founded on the premise that the works contract
was a composite contract which is inseparable and indivisible. Entry 48 of List II of
Schedule Seven of the Government of India Act, 1935 was under consideration before this
Court in Gannon Dunkerley-I3. It is observed that the expression “sale of goods” in that
entry has the same meaning as the said expression had in the Sale of Goods Act, 1930. In
other words, the essential ingredients of sale of goods are (i) an agreement to sell
movables for a price and (ii) property passing therein pursuant to that agreement. - The problems connected with powers of States to levy tax, inter alia, on goods
involved in execution of works contract following Gannon Dunkerley-I3 was elaborately
examined by the Law Commission of India. In its 61st Report, Chapter 1A, the Law
Commission specifically examined the taxability of works contract. The Law Commission
noted the essential nature and features of the building contracts and the difference between
contract of works and contract for sale. It examined the question whether the power to tax
indivisible contracts of works should be conferred on the States. The Law Commission
suggested three alternatives (a) amendment in the State List, Entry 54, or (b) adding a fresh
entry in the State List, or (c) insertion in Article 366 a wide definition of “sale” so as to
include works contract. It preferred the last one, as, in its opinion, this would avoid
multiple amendments. - Having regard to the above recommendation of the Law Commission, the
Constitution Bill No.52 of 1981 was introduced in the Parliament. - The Parliament then enacted the Constitution (Forty-sixth Amendment) Act, 1982
which received the assent of the President on 02.02.1983. Accordingly, clause 29-A was
inserted in Article 366 of the Constitution which is set out as below.
(ii) the transfer of property in goods involved in the execution of a works contract;
(iii) delivery of goods on hire-purchase or any system of payment by instalments;
(iv) transfer of the right to use any goods for any purpose for cash, deferred payment or
other valuable consideration;
(v) the supply of goods by an unincorporated association or body of persons to a member
thereof for cash, deferred payment or other valuable consideration;
(vi) the supply, by way of or as part of any service, of food or any drink for cash, deferred
payment or other valuable consideration.
- Clause (3) of article 286 is proposed to be amended to enable Parliament to specify, by
law, restrictions and conditions in regard to the system of levy, rates and other incidents of the
tax on the transfer of goods involved in the execution of a works contract, on the delivery
of goods on hire-purchase or any system of payment by instalments and on the right to use
any goods. - The proposed amendments would help in the augmentation of the State revenues to a
considerable extent. Clause 6 of the Bill seeks to validate laws levying tax on the supply of
food or drink for consideration and also the collection or recoveries made by way
of tax under any such law. However, no sales tax will be payable on food or drink
supplied by a hotelier to a person lodged in the hotel during the period from the date of the
judgment in the Associated Hotels of India case and the commencement of the present
Amendment Act if the conditions mentioned in sub-clause (2) of clause 6 of the Bill are
satisfied. In the case of food or drink supplied by restaurants this relief will be available only
in respect of the period after the date of judgment in the Northern India Caterers (India)
Limited case and the commencement of the present Amendment Act.”
(29-A) “tax on the sale or purchase of goods” includes—
(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods
for cash, deferred payment or other valuable consideration;
(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;
(c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments;
(d) a tax on the 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;
(e) a tax on the supply of goods by any unincorporated association or body of persons to a
member thereof for cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever,
of goods, being food or any ‘other article for human consumption or any drink (whether or not
intoxicating), where such supply or service, is for cash, deferred payment or other valuable
consideration,
and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods
by the person making the transfer, delivery or supply and a purchase of those goods by the
person to whom such transfer, delivery or supply is made;’. - Following the above amendment in the Constitution, the sales tax legislations in various
States were amended and provisions were made for imposition of sales tax in relation to works
contract. The constitutional validity of the Forty-sixth Amendment by which the
legislatures of the States were empowered to levy sales tax on certain transactions described in
clauses (a) to (f) of clause 29-A of Article 366 of the Constitution as well as the amendments
made in the State legislations were challenged in Builders’ AssociationThe Constitution
Bench of this Court upheld the constitutionality of the Forty-sixth Amendment. The Court
observed that the object of the new definition introduced in clause 29-A of Article 366 of the
Constitution was to enlarge the scope of the expression “tax of sale or purchase of goods”
wherever it occurs in the Constitution so that it may include within its scope any transfer,
delivery or supply of goods that may take place under any of the transactions referred to in
sub-clauses (a) to (f). The Constitution Bench explained that clause 29-A refers to 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. The emphasis is on the transfer of property in goods –
whether as goods or in some other form. A transfer of property in goods under sub-clause
(b) of clause 29-A is deemed to be a sale of the goods involved in the execution of a
works contract by the person making the transfer and a purchase of those goods by a person to
whom such transfer was made.
- Article 286 puts certain restrictions upon the power of the State to enact laws
concerning imposition of sales tax. It lays down that no law of a State shall impose or authorise
the imposition of a tax on the sale or purchase of goods where such sale or purchase takes place
(a) outside the State, or (b) in the course of import of the goods into, or export of the goods
out of the territory of India. Sub-clause (2) of Article 286 enables the Parliament to enact
law formulating principles for determining when a sale or purchase of goods takes place in
any of the ways mentioned in clause (1). As regards inter-state trade and commerce, clause
(3) puts two restrictions. It provides that any law of a State shall, insofar as it imposes, or
authorises the imposition of (a) a tax on the sale or purchase of goods declared by Parliament
by law to be of special importance in inter-state trade or commerce; (b) a tax on the sale or
purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) and
sub-clause
(d) of clause 29-A of Article 366, be subject to such restrictions and conditions in
regard to the system of levy, rates and other incidents of tax as the Parliament may by law
specify. Clause (3) was substituted by Constitution Forty-sixth Amendment Act, 1982 with
effect from 02.02.1983. - Clause 29-A was inserted in Article 366 by the Forty-sixth Amendment with effect
from 02.02.1983. Entry 54 of List II (State List) -enables the State to make laws relating to
taxes on the sale or purchase of goods other than the newspapers, subject to the provisions of
Entry 92-A of List I. Entry 63 of List II enables the States to provide rates of stamp duty in
respect of documents other than those specified in provisions of List I with regard to the rates
of stamp duty. Entry 92-A of List I deals with taxes on the sale or purchase of goods other
than newspapers where such sale or purchase takes place in the course of inter-state trade
or commerce. Entry 6 of List III deals with the subjects, “transfer of property other than the
agricultural land; registration of deeds and documents”.
- It is important to ascertain the meaning of sub-clause (b) of clause 29-A of Article 366
of the Constitution. As the very title of Article 366 shows, it is the definition clause. It
starts by saying that in the Constitution unless the context otherwise requires the
expressions defined in that article shall have the meanings respectively assigned to them in the
article. The definition of expression “tax on sale or purchase of the goods” is contained in
clause (29-A). If the first part of clause 29-A is read with sub-clause (b) along with latter
part of this clause, it reads like this: tax on the sale or purchaser of the goods” includes 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 and such transfer, delivery or supply of any goods shall be
deemed to be a sale of those goods by the person making the transfer, delivery or supply and
a purchase of those goods by the person to whom such transfer, delivery or supply is made.
The definition of “goods” in clause 12 is inclusive. It includes all materials, commodities and
articles. The expression, ‘goods’ has a broader meaning than merchandise. Chattels
or movables are goods within the meaning of clause 12. Sub-clause (b) refers to
transfer of property in goods (whether as goods or in some other form) involved in
the execution of a works contract. The expression “in some other form” in the bracket is of
utmost significance as by this expression the ordinary understanding of the term ‘goods’ has
been enlarged by bringing within its fold goods in a form other than goods. Goods in
some other form would thus mean goods which have ceased to be chattels or
movables or merchandise and become attached or embedded to earth. In other words, goods
which have by incorporation become part of immovable property are deemed as goods. The
definition of ‘tax on the sale or purchase of goods’ includes a tax on the transfer or property in
the goods as goods or which have lost its form as goods and have acquired some other form
involved in the execution of a works contract. - Viewed thus, a transfer of property in goods under clause 29-A(b) of Article 366 is
deemed to be a sale of the goods involved in the execution of a works contract by the person
making the transfer and the purchase of those goods by the person to whom such transfer is
made. - The States have now been conferred with the power to tax indivisible contracts of
works. This has been done by enlarging the scope of “tax on sale or purchase of
goods” wherever it occurs in the Constitution. Accordingly, the expression “tax on the
sale or purchase of goods” in Entry 54 of List II of Seventh Schedule when read with
the definition clause 29-A, includes a tax on the transfer of property in goods whether as
goods or in the form other than goods involved in the execution of works contract. The taxable
event is deemed sale.
- Gannon Dunkerley-I and few other decisions following Gannon Dunkerley-I wherein
the expression “sale” was given restricted meaning by adopting the definition of the word
“sale” contained in the Sale of Goods Act has been undone by the Forty-sixth
Constitutional Amendment so as to include works contract. The meaning of sub-clause (b) of
clause 29-A of Article 366 of the Constitution also stands settled by the Constitution Bench of
this Court in Builders’ Association - As a result of clause 29-A of Article 366, tax on the
sale or purchase of goods may include a tax on the transfer in goods as goods or in a form
other than goods involved in the execution of the works contract. It is open to the States to
divide the works contract into two separate contracts by legal fiction: (i) contract for sale of
goods involved in the works contract and (ii) for supply of labour and service. By the Fortysixth Amendment, States have been empowered to bifurcate the contract and to levy sales
tax on the value of the material in the execution of the works contract. - Whether contract involved a dominant intention to transfer the property in goods, in our
view, is not at all material. It is not necessary to ascertain what is the dominant intention
of the contract. Even if the dominant intention of the contract is not to transfer the
property in goods and rather it is the rendering of service or the ultimate transaction is
transfer of immovable property, then also it is open to the States to levy sales tax on the
materials used in such contract if it otherwise has elements of works contract. The view
taken by a two-Judge Bench of this Court in Rainbow Colour Lab
16 that the division of the
contract after Forty- sixth Amendment can be made only if the works contract involved
a dominant intention to transfer the property in goods and not in contracts where the transfer
of property takes place as an incident of contract of service is no longer good law,
Rainbow Colour Lab
has been expressly overruled by a three-Judge Bench in Associated
Cement. - Although, in Bharat Sanchar, the Court was concerned with sub-clause (d) of clause 29-
A of Article 366 but while dealing with the question as to whether the nature of
transaction by which mobile phone connections are enjoyed is a sale or service or both,
the three-Judge Bench did consider the scope of definition in clause 29-A of Article 366.
With reference to sub-clause (b) it said: “……. sub-clause (b) covers cases relating to works
contract. This was the particular fact situation which the Court was faced with in Gannon
Dunkerley-I and which the Court had held was not a sale. The effect in law of a transfer of
property in goods involved in the execution of the works contract was by this amendment
deemed to be a sale. To that extent the decision in Gannon Dunkerley-I was directly
overcome”. It then went on to say that all the sub-clauses of Article 366(29-A) serve to bring
transactions where essential ingredients of a ‘sale’ as defined in the Sale of Goods Act, 1930
are absent, within the ambit of purchase or sale for the purposes of levy of sales tax.
- It then clarified that Gannon Dunkerley-I survived the Forty- sixth Constitutional
Amendment in two respects. First, with regard to the definition of “sale” for the purposes of
the Constitution in general and for the purposes of Entry 54 of List II in particular except to the
extent that the clauses in Article 366(29-A) operate and second, the dominant nature test would
be confined to a composite transaction not covered by Article 366 (29-A). In other words, in
Bharat Sanchar
5, this Court reiterated what was stated by this Court in Associated Cement
15
that dominant nature test has no application to a composite transaction covered by the clauses of
Article 366(29-A). Leaving no ambiguity, it said that after the Forty-sixth
Amendment, the sale element of those contracts which are covered by six sub-clauses of
clause 29-A of Article 366 are separable and may be subjected to sales tax by the States
under Entry 54 of List II and there is no question of the dominant nature test applying. - In view of the statement of law in Associated Cement and Bharat Sanchar, the argument
advanced on behalf of the appellants that dominant nature test must be applied to find
out the true nature of transaction as to whether there is a contract for sale of goods or
the contract of service in a composite transaction covered by the clauses of Article 366 (29-
A) has no merit and the same is rejected. - In Gannon Dunkerley-II11, this Court, inter alia, established the five following propositions
: (i) as a result of Forty-sixth Amendment the contract which was single and indivisible has
been altered by a legal fiction into a contract which is divisible into one for sale of goods and the
other for supply of labour and service and as a result of such contract which was single and
indivisible has been brought on par with a contract containing two separate agreements; (ii) if
the legal fiction introduced by Article 366 (29-A)(b) is carried to its logical end, it follows
that even in a single and indivisible works contract there is a deemed sale of the goods
which are involved in the execution of a works contract. Such a deemed sale has all the
incidents of the sale of goods involved in the execution of a works contract where the
contract is divisible into one for sale of goods and the other for supply of labour and
services; (iii) in view of sub-clause (b) of clause 29-A of Article 366, the State legislatures
are competent to impose tax on the transfer of property in goods involved in the execution of
works contract. Under Article 286(3)(b), Parliament has been empowered to make a law
specifying restrictions and conditions in regard to the system of levy, rates or incidents of such
tax. This does not mean that the legislative power of the State cannot be exercised till the
enactment of the law under Article 286(3)(b) by the Parliament. It only means that in the
event of law having been made by Parliament under Article 286(3)(b), the exercise of the
legislative power of the State under Entry 54 in List II to impose tax of the nature referred to
in sub-clauses (b), (c) and (d) of clause (29-A) of Article 366 would be subject to restrictions
and conditions in regard to the system of levy, rates and other incidents of tax contained in the
said law; (iv) while enacting law imposing a tax on sale or purchase of goods under Entry 54
of the State List read with Article 366 (29-A)(b), it is permissible for the State legislature to
make a law imposing tax on such a deemed sale which constitutes a sale in the course
of the inter-state trade or commerce under Section 3 of the Central Sales Tax Act or outside
under Section 4 of the Central Sales Tax Act or sale in the course of import or export under
Section 5 of the Central Sales Tax Act; and (v) measure for the levy of tax contemplated by
Article 366 (29-A)(b) is the value of the goods involved in the execution of a works
contract. Though the tax is imposed on the transfer of property in goods involved in the
execution of a works contract, the measure for levy of such imposition is the value of the goods
involved in the execution of a works contract. Since, the taxable event is the transfer of
property in goods involved in the execution of a works contract and the said transfer of
property in such goods takes place when the goods are incorporated in the works, the value
of the goods which can constitute the measure for the levy of the tax has to be the value of the
goods at the time of incorporation of the goods in works and not the cost of acquisition of the
goods by the contractor.
- In Gannon Dunkerley-II, sub-section (3) of Section 5 of the Rajasthan Sales Tax Act and
Rule 29(2)(1) of the Rajasthan Sales Tax Rules were declared as unconstitutional and
void. It was so declared because the Court found that Section 5(3) transgressed the limits
of the legislative power conferred on the State legislature under Entry 54 of the State List.
However, insofar as legal position after Forty-sixth Amendment is concerned, Gannon
Dunkerley-II11 holds unambiguously that the States have now legislative power to impose tax
on transfer of property in goods as goods or in some other form in the execution of works
contract. - The Forty-sixth Amendment leaves no manner of doubt that the States have power to
bifurcate the contract and levy sales tax on the value of the material involved in the execution
of the works contract. The States are now empowered to levy sales tax on the material used in
such contract. In other words, clause 29-A of Article 366 empowers the States to levy tax on the
deemed sale. - Now, if by legal fiction provided in clause (29-A)(b) of Article 366, the works contract
becomes separable and divisible, one for the materials and the other for services and for
the work done, whatever has been said by this Court in Gannon Dunkerley-I with regard to the
definition of works contract in Section 2(i) of the Madras General Sales Tax Act pales
into insignificance insofar as ambit and scope of the term “works contract” within the
meaning of Article 366(29-A) is concerned. To say that insertion of clause (29-A) in
Article 366 has not undone Gannon Dunkerley-I in any manner, in our view, is
not correct. The narrow meaning given to the term “works contract” in Gannon Dunkerley-I
now no longer survives.
- There is no doubt that to attract Article 366(29-A)(b) there has to be a works contract but
then what is its meaning. The term “works contract” needs to be understood in a manner that
the Parliament had in its view at the time of Forty-sixth Amendment and which is more
appropriate to Article 366(29-A)(b). - In our opinion, the term ‘works contract’ in Article 366(29-A)(b) is amply wide and cannot
be confined to a particular understanding of the term or to a particular form. The term
encompasses a wide range and many varieties of contract. The Parliament had such wide
meaning of “works contract” in its view at the time of Forty-sixth Amendment. The
object of insertion of clause 29-A in Article 366 was to enlarge the scope of the expression “tax
of sale or purchase of goods” and overcome Gannon Dunkerley-I. Seen thus, even if in a
contract, besides the obligations of supply of goods and materials and performance of labour
and services, some additional obligations are imposed, such contract does not cease to be
works contract. The additional obligations in the contract would not alter the nature of contract
so long as the contract provides for a contract for works and satisfies the primary
description of works contract. Once the characteristics or elements of works contract are
satisfied in a contract then irrespective of additional obligations, such contract would be
covered by the term ‘works contract’. Nothing in Article 366(29-A)(b) limits the term “works
contract” to contract for labour and service only.
The Parliament had all genre of works contract in view when clause 29-A was inserted in
Article 366. - The difference between a contract for work (or service) and a contract for sale (of goods)
has come up for consideration before this Court on more than one occasion. Before we
consider some of the decisions of this Court in this regard, it is of interest to refer to
two old decisions of English courts. In Lee, it was laid down that if a contract would
result in the transaction of property in goods from one party to another then it must be a
contract of sale. - However, the statement of law in Lee
did not find favour in Robinson where it was held
that if the substance of the contract required skill and labour for the production of the articles
then it would not make any difference that there would pass some materials in addition to the
skill. - In Chandra Bhan Gosain
this Court exposited that for finding out whether a contract is one
of work done and materials found or one for sale of goods depends on its essence. If not of its
essence that a chattel should be produced and transferred as a chattel, then it may be a contract
for work done and materials found and not a contract for sale of goods.
- In Purshottam Premji, the difference between a contract for work and a contract for sale
was explained like this: The primary difference between a contract for work or service and a
contract for sale of goods is that in the former there is in the person performing work or
rendering service no property in the thing produced as a whole notwithstanding that a part or
even the whole of the materials used by him may have been its property. In a case of
contract for sale, the thing produced as a whole has individual existence as the sole property
of the party who produced it at some time before delivery and the property therein passes
only under the contract relating thereto to other party for price. Mere transfer of property in
goods used in the performance of the contract is not sufficient; to constitute a sale
there must be an agreement express or implied relating to the sale of goods and completion of
the agreement by passing of title in the very goods contracted to be sold. Ultimately the
true effect of an accretion made pursuant to a contract has to be judged, not by an artificial
rule that the accretion may be presumed to have become by virtue of affixing to a
chattel of part of that chattel but from the intention of the parties to the contract. - The factors highlighted in Purshottam Premji which distinguish a contract for work
from a contract for sale are relevant but not exhaustive. It is not correct to say that these factors
should be considered as the only factors to differentiate a works contract and a contract for sale.
In our view, there are not and there cannot be absolute tests to distinguish a sale and works
contract. - This Court in Associated Hotels, stated that the determination as
to whether the contract involved in a transaction constitutes a contract of sale or a
contract of work or service depends in each case upon its facts and circumstances. Mere
passing of property in article or commodity during the course of the performance of
the transaction does not render it a transaction of sale. For even in a contract purely of work or
service, it is possible that articles may have to be used by the person executing the work and
property in such cases articles or materials where passed to the other party. That would
not necessarily convert the contract into one of sale of those materials. It is stated in
Associated Hotels that in every case the Court will have to find out what is the primary object of
the transaction and the intention of the parties while entering upon it. It has been clarified that
in some cases it may be that even while entering into a contract of work or even service,
parties might enter into separate agreements, one of work and service and the other of sale and
purchase of materials to be used in the course of executing the work or performing the service.
But, then in such cases the transaction will not be one and indivisible but will fall into the
two separate agreements one of work or service and the other of sale. - In Hindustan Aeronautics26, the Court noted the difference between contract for
service and contract for sale of goods in these words:
“13. It is well settled that the difference between contract of service and contract for sale of
goods, is, that in the former, there is in the person performing work or rendering service no
property in the things produced as a whole notwithstanding that a part or even the whole of
materials used by him had been his property. In the case of a contract for sale, the thing
produced as a whole has individual existence as the sole property of the party who
produced it sometime before delivery and the property therein passed only under the contract
relating thereto to the other party for price. It is necessary, whether in essence there was any
agreement to work for a stipulated consideration…………”
- The Court went on to say further in Hindustan Aeronautics as follows;
“18. It cannot be said as a general proposition that in every case of works contract, there is
necessarily implied the sale of the component parts which go to make up the repair. That
question would naturally depend upon the facts and circumstances of each case. Mere
passing of property in an article or commodity during the course of performance of the
therefore, in every case for the courts to find out transaction in question does not render the
transaction to be transaction of sale. Even in a contract purely of works or service, it is
possible that articles may have to be used by the person executing the work, and property in
such articles or materials may pass to the other party. That would not necessarily convert
the contract into one of sale of those materials……” - In Kone Elevators
27, the Court again highlighted the tests to distinguish a works contract
and a contract for sale of goods. The Court said;
“5. It can be treated as well settled that there is no standard formula by which one can
distinguish a “contract for sale” from a “works contract”. The question is largely one of fact
depending upon the terms of the contract including the nature of the obligations to be
discharged thereunder and the surrounding circumstances. If the intention is to transfer for a
price a chattel in which the transferee had no previous property, then the contract is a contract
for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be
judged not by artificial rules but from the intention of the parties to the contract. In a “contract
of sale”, the main object is the transfer of property and delivery of possession of the property,
whereas the main object in a “contract for work” is not the transfer of the property but it is
one for work and labour. Another test often to be applied is: when and how the property of
the dealer in such a transaction passes to the customer: is it by transfer at the time of delivery of
the finished article as a chattel or by accession during the procession of work on fusion
to the movable property of the customer? If it is the former, it is a “sale”; if it is the latter, it is a
“works contract”. Therefore, in judging whether the contract is for a “sale” or for “work
and labour”, the essence of the contract or the reality of the transaction as a whole has to be
taken into consideration. The predominant object of the contract, the circumstances of the
case and the custom of the trade provide a guide in deciding whether transaction is a
“sale” or a “works contract”. Essentially, the question is of interpretation of the “contract”. It is
settled law that the substance and not the form of the contract is material in determining
the nature of transaction. No definite rule can be formulated to determine the question as
to whether a particular given contract is a contract for sale of goods or is a works contract.
Ultimately, the terms of a given contract would be determinative of the nature of the
transaction, whether it is a “sale” or a “works contract”. Therefore, this question has to
be ascertained on facts of each case, on proper construction of terms and conditions of the
contract between the parties.”
- It seems to us (and that is the view taken in some of the decisions) that a contract
may involve both a contract of work and labour and a contract of sale of goods. In our
opinion, the distinction between contract for sale of goods and contract for work (or
service) has almost diminished in the matters of composite contract involving both (a contract
of work/labour and a contract for sale for the purposes of Article 366 (29-A)(b). Now
by legal fiction under Article 366(29-A)(b), it is permissible to make such contract divisible
by separating the transfer of property in goods as goods or in some other form from the
contract of work and
labour. A transfer of property in goods under clause 29(A)(b) of Article 366 is deemed to be a
sale of goods involved in the execution of a works contract by the person making the
transfer and the purchase of those goods by the person to whom such transfer is made. For
this reason, the traditional decisions which hold that the substance of the contract must be seen
have lost their significance. What was viewed traditionally has to be now understood in light of
the philosophy of Article 366(29-A). - The question is: Whether taxing sale of goods in an agreement for sale of
flat which is to be constructed by the developer/promoter is permissible under
the Constitution? When the agreement between the promoter/developer and the flat
purchaser is to construct a flat and eventually sell the flat with the fraction of land, it is
obvious that such transaction involves the activity of construction inasmuch as it is only when
the flat is constructed then it can be conveyed. We, therefore, think that there is no reason
why such activity of construction is not covered by the term “works contract”. After all,
the term “works contract” is nothing but a contract in which one of the parties is obliged to
undertake or to execute works. Such activity of construction has all the characteristics or
elements of works contract. The ultimate transaction between the parties may be sale of
flat but it cannot be said that the characteristics of works contract are not involved in that
transaction. When the transaction involves the activity of construction, the factors such as, the
flat purchaser has no control over the type and standard of the material to be used in the
construction of building or he does not get any right to monitor or supervise the
construction activity or he has no say in the designing or lay-out of the building, in
our view, are not of much significance and in any case these factors do not detract the
contract being works contract insofar as construction part is concerned.
- For sustaining the levy of tax on the goods deemed to have been sold in execution of a
works contract, in our opinion, three conditions must be fulfilled: (i) there must be a works
contract, (ii) the goods should have been involved in the execution of a works contract,
and (iii) the property in those goods must be transferred to a third party either as goods or in
some other form. In a building contract or any contract to do construction, the above
three things are fully met. In a contract to build a flat there will necessarily be a sale of
goods element. Works contracts also include building contracts and therefore
without any fear of contradiction it can be stated that building contracts are species of
the works contract. - Ordinarily in the case of a works contract the property in the goods used in the
construction of the building passes to the owner of the land on which the building is
constructed when the goods and materials used are incorporated in the building. But there
may be contract to the contrary or a statute may provide otherwise. Therefore, it cannot be
said to be an absolute proposition in law that the ownership of the goods must pass by way
of accretion or exertion to the owner of the immovable property to which they are affixed
or upon which the building is built. - Value addition as a concept after Forty-sixth Amendment to the Constitution has been
accepted by this Court in P.N.C. Construction While dealing with this concept, the Court
said that value addition was important concept which had arisen after the Forty-sixth
Amendment by insertion of sub-clause (b) of clause (29-A) in Article 366. It has now
become possible for the States to levy sales tax on the value of the goods involved in a works
contract in the same way in which the sales tax was leviable on the price of the goods in a
building contract. On account of the Forty-sixth Amendment in the Constitution the State
Governments are empowered to levy sales tax on the contract value which earlier was not
possible - Where a contract comprises of both a works contract and a transfer of immovable
property, such contract does not denude it of its character as works contract. Article
366(29-A)(b) does contemplate a situation where the goods may not be transferred in the
form of goods but may be transferred in some other form which may even be in the form of
immovable property. - We have no doubt that the State legislatures lack legislative power to levy tax on the
transfer of immovable property under Entry 54 of List II of the Seventh Schedule. However,
the States do have competence to levy sales tax on the sale of goods in an agreement of sale of
flat which also has a component of a deemed sale of goods. Aspects theory though does not
allow the State legislature to entrench upon the Union List and tax services by including the
cost of such service in the value of goods but that does not detract the State to tax the sale of
goods element involved in the execution of works contract in a composite contract like
contract for construction of building and sale of a flat therein. In para 88 of Bharat
Sanchar5, the Court stated: “the aspects theory does not however allow the State to entrench
upon the Union List and tax services by including the cost of such service in the value of the
goods. Even in those composite contracts which are by legal fiction deemed to be divisible
under Article 366(29-A), the value of the goods involved in the execution of the whole
transaction cannot be assessed to sales tax”. Having said that, the Court also stated that the
States were not competent to include the cost of service in the value of the goods sold (i.e.
the sim card) nor the Parliament could include the value of the sim card in the cost of
services. But the statement in para 92(C) of the Report is clear that it is upto the States to tax
the sale of goods element in a composite contract of sale and service. Bharat Sanchar5 thus
supports the view that taxation of different aspects of the same transaction as separate taxable
events is permissible.
- In light of the above discussion, we may summarise the legal position, as follows:
(i) For sustaining the levy of tax on the goods deemed to have been sold in execution of a
works contract, three conditions must be fulfilled: (one) there must be a works contract, (two)
the goods should have been involved in the execution of a works contract and (three) the
property in those goods must be transferred to a third party either as goods or in some other
form.
(ii) For the purposes of Article 366(29-A)(b), in a building contract or any contract to do
construction, if the developer has received or is entitled to receive valuable consideration,
the above three things are fully met. It is so because in the performance of a contract for
construction of building, the goods (chattels) like cement, concrete, steel, bricks etc. are
intended to be incorporated in the structure and even though they lost their identity as goods but
this factor does not prevent them from being goods.
(iii) Where a contract comprises of both a works contract and a transfer of immovable
property, such contract does not denude it of its character as works contract. The term
“works contract” in Article 366 (29-A)(b) takes within its fold all genre of works contract and is
not restricted to one specie of contract to provide for labour and services alone. Nothing in
Article 366(29-A)(b) limits the term “works contract”.
(iv) Building contracts are species of the works contract.
(v) A contract may involve both a contract of work and labour and a contract for sale. In such
composite contract, the distinction between contract for sale of goods and contract for
work (or service) is virtually diminished.
(vi) The dominant nature test has no application and the traditional decisions which have held
that the substance of the contract must be seen have lost their significance where
transactions are of the nature contemplated in Article 366(29-A). Even if the dominant
intention of the contract is not to transfer the property in goods and rather it is rendering of
service or the ultimate transaction is transfer of immovable property, then also it is open to the
States to levy sales tax on the materials used in such contract if such contract otherwise has
elements of works contract. The enforceability test is also not determinative.
(vii) A transfer of property in goods under clause 29-A(b) of Article 366 is deemed to be a
sale of the goods involved in the execution of a works contract by the person making the
transfer and the purchase of those goods by the person to whom such transfer is made.
(viii) Even in a single and indivisible works contract, by virtue of the legal fiction introduced
by Article 366(29-A)(b), there is a deemed sale of goods which are involved in the execution
of the works contract. Such a deemed sale has all the incidents of the sale of goods
involved in the execution of a works contract where the contract is divisible into one for the
sale of goods and the other for supply of labour and services. In other words, the single and
indivisible contract, now by Forty-sixth Amendment has been brought on par with a
contract containing two separate agreements and States have now power to levy sales tax
on the value of the material in the execution of works contract.
(ix) The expression “tax on the sale or purchase of goods” in Entry 54 in List II of Seventh
Schedule when read with the definition clause 29-A of Article 366 includes a tax on the
transfer of property in goods whether as goods or in the form other than goods involved in
the execution of works contract.
(x) Article 366(29-A)(b) serves to bring transactions where essential ingredients of
‘sale’ defined in the Sale of Goods Act, 1930 are absent within the ambit of sale or
purchase for the purposes of levy of sales tax. In other words, transfer of movable property
in a works contract is deemed to be sale even though it may not be sale within the meaning of
the Sale of Goods Act.
(xi) Taxing the sale of goods element in a works contract under Article 366(29-A)(b) read
with Entry 54 List II is permissible even after incorporation of goods provided tax is
directed to the value of goods and does not purport to tax the transfer of immovable property.
The value of the goods which can constitute the measure for the levy of the tax has to be the
value of the goods at the time of incorporation of the goods in works even though property
passes as between the developer and the flat purchaser after incorporation of goods.
- The crucial question would now remain: whether the view taken in Raheja
Development1 with reference to definition of “works contract” in KST Act is legally
unjustified? The following definition of “works contract” was under consideration before
this Court in Raheja Development “works contract” includes any 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 moveable or immovable property”. - The Court also noticed the definition of “dealer” and “taxable turn over ”.
- The broad facts in Raheja Development were these:
Raheja Development carried on the business of real estate development and allied
contracts;
Raheja Development entered into development agreements with the owners of land;
Raheja Development entered into agreements of sale with intended purchasers. The
agreements provided that on completion of the construction, the residential apartments or the
commercial complexes would be handed over to the purchasers who would get an undivided
interest in the land also;
The owners of the land would then transfer the ownership directly to the society formed
under the Karnataka Ownership Flat (Regulation of the Promotion of Construction, Sale,
Management and Transfer) Act, 1972 (for short, ‘KOFA’).
- In light of the above facts and the definition of “works contract”, the question
before this Court was whether Raheja Development were liable to pay turnover tax on the
value of goods involved in the execution of the works contract. - Section 5-B of the KST Act provides for levy of tax on transfer of property in goods
(whether as goods or in some other form) involved in the execution of works contract. - On consideration of the arguments that were put forth by the parties, the Court in Raheja
Development
1 held as under:
(i) The definition of the term “works contract” in the Act is an inclusive definition.
(ii) It is a wide definition which includes “any agreement” for carrying out building or
construction activity for cash, deferred payment or other valuable consideration.
(iii) The definition of works contract does not make a distinction based on who carries on
the construction activity. Even an owner of the property may 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.
(iv) The developers had undertaken to build for the prospective purchaser.
(v) Such construction/development was to be on payment of a price in various installments
set out in the agreement.
(vi) The developers were not the owners. They claimed lien on the property. They had right to
terminate the agreement and dispose of the unit if a breach was committed by the purchaser.
A clause like this does not mean that the agreement ceases to be “works contract”. So long
as there is no termination, the construction is for and on behalf of the purchaser and it
remains a “works contract”.
(vii) If there is a termination and a particular unit is not resold but retained by the developer,
there would be no works contract to that extent.
(viii) 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 works contract.
- The correctness of the view taken in Raheja Development has been doubted in the
referral order principally for the reasons: (a) the developer had undertaken the contract to
develop the property of the owner. It is not alleged by the department that there is
monetary consideration involved in the development agreement. If the development agreement
is not a works contract, could the department rely upon the second contract which is the
tripartite agreement and interpret it to be a works contract; (b)if the ratio in Raheja
Development is to be accepted then there would be no difference between works contract and
a contract for sale of chattel as a chattel and (c) from the definition of works contract, the
contractor must have undertaken the work of construction for and on behalf of the flat
purchaser for cash, deferred or any other valuable consideration but could it be said that
developer was contractor for the prospective flat purchaser. - In Raheja Development1, the Court on consideration of the clauses (q) and (r) of the
recitals and clauses (1), 5(c) and (vii) of the agreement between the flat purchaser,
developer and owner of the land observed that the agreement had an element for carrying out
building and construction activity for cash, deferred payment or other valuable
consideration. The developer had undertaken to build for the prospective purchaser. Having
regard to the various clauses of the recitals and also the clauses of the agreement, the Court was
of the view that such agreement was a typical agreement and so long as there was no
termination of the contract, the construction is for and on behalf of the purchaser and it
remains a “works contract”. - In Article 366(29-A)(b), the term ‘works contract’ covers all genre of works contract
and it is not limited to one specie of the contract. In Raheja Development
1, the definition of
“works contract” in KST Act was under consideration. That definition of “works contract”
is inclusive and refers to building contracts and diverse construction activities for monetary
consideration viz; for cash, deferred payment or other valuable consideration as
works contract. Having regard to the factual position, interalia, Raheja Development1 entered
into development agreements with the owners of the land and it also entered into agreements for
sale with the flat purchasers, the consideration being payment in installments and also the
clauses of the agreement the Court held that developer had undertaken to build for the flat
purchaser and so long as there was no termination of the contract, the construction is for and
on behalf of the purchaser and it remains a “works contract”. The legal position
summarized by us and the foregoing discussion would justify the view taken by the two Judge
Bench in Raheja Development1.
- It may, however, be clarified that activity of construction undertaken by the
developer would be works 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. - The reasons stated in the referral order for reconsideration of Raheja Development
1 do not
make out any good ground for taking a view different from what has been taken by this Court
in Raheja Development. We are in agreement with the submission of Mr. K.N. Bhat that
since Raheja Development
in May, 2005 almost all States have modified their laws in line
with Raheja Development and there is no justification for change in the position settled
after the decision of this Court in Raheja Development.
18. We are clearly of the view that Raheja Development1 lays down the correct legal
position and we approve the same. 120. Clause (24) of Section 2 defines sale to mean a
sale of goods made within the State for cash or deferred payment or other valuable
consideration but does not include a mortgage, hypothecation, charge of pledge; and the
words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate
expressions. An explanation is appended to this clause. Clause (b) of the explanation to
Section 2(24) defines what would be a sale for the purpose of the clause and brought in its
ambit the transactions mentioned therein. Explanation (b)(ii) was amended with effect
from 20.06.2006 by inserting the following words after the words “works contract”: “including,
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”.
124. There is no doubt in our mind that the amendment in explanation b(ii) to
Section 2(24) was brought because of the judgment of this Court in Raheja Development.
We have already held that Raheja Development lays down the correct legal position.
125. Once we have held that Raheja Development lays down the correct law, in our opinion,
nothing turns on the circular dated 07.02.2007 and the notification dated 09.07.2010. The
circular is a trade circular which is clarificatory in nature only. The notification enables the
registered dealer to opt for a composition scheme. The High Court has dealt with the circular
and notification. We do not find any error in the view of the High Court in this regard.
