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A GUIDE TO SALES TAX ON APARTMENT BUILDINGS

Works Contract is most questioned and frequently litigated issue in the

Court of Law, and also between the purchaser of the flat and promoter.

The decision of the Honble Supreme Court in Gannon Dunkerleys case stating that the expression Sale of goods as used in Seventh Schedule of Constitution has the same meaning as in Sale of Goods Act made the law

commission in its sixty first report to recommend to amend the

Constitution of India - Accordingly 46th amendment was passed in 1982.

This empowered the states to legislate laws to levy tax on transfer of

property. The goods involved in execution of works contract may be in

the form of goods or in any other form. Article 269 of the Constitution

provides for levy of tax on sale or purchase of goods other than news

paper. In case of interstate trade and commerce, the tax is to be levied by

Government of India, but assigned to the states in which tax is leviable.

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Article 286 of the Indian Constitution works as restraint on the authority

of the same.

Work contract

One has to distinguish the difference between contract of sale of goods

and contract of work. The difference is very thin. It is terms of the

contract and nature of the obligation to be discharged, which distinguishes

works contract from contract for sale.

In case of sale of goods, goods are delivered as they are to the purchaser,

whereas in case of works contract, the goods are delivered in a modified

form. This may be well explained in the purchase of readymade house,

which is sale of goods and contract to construct a house, which is a works

contract. In purchase of readymade house, the house is delivered as it is,

whereas in case of contract for construction, the house is constructed

using various materials and delivered to the purchaser. This is well

explained in case HAL Vs State of Karnataka (1984) 55 STC 314.

In another case HAL Vs State of Orissa,Honble Supreme Court has observed that in contract of works there is a person performing or

rendering service on property, where as in case of sale of property there

is individual existence of the property as a whole, which is being delivered

to the purchaser.

Types of Contracts

There is no well established formula by which contract for sale and

contract of work can be distinguished. Any contract which contains not

only the work but also requires goods to be used may be of the following

three types;

Contract may be for works to be done for remuneration and also for

supply of goods in execution of work. This is a composite contract.

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It may be contract of work in which use of materials is incidental to

the execution of the work. This is contract for work and labour not

involving sale of goods.

It may be contract for supply of goods where some work is required

as incidental to sale. This is purely a contract of work.

Agreements, where in land and buildings are conveyed to the prospective

purchaser and proper stamp duty is paid on such conveyance are transfer

of immovable property and are not liable to tax under sale tax laws.

Agreement with Builder

However we shall examine cases, where developer executes General

Power of Attorney in favour of builders for valuable consideration such

contracts may be any of the following types;

Power of attorney for valuable consideration.

For valuable consideration in part and partly by way of constructed

property.

Honble Supreme Court in Raheja Development Corporation Vs State of Karnataka (Appeal [Civil]) 2766 of 2000 5/5/2000 observed that the definition of works contract under Karnataka Sales tax is very wide and

not restricted to works contract, it also includes any agreement for carrying out either for cash or for deferred payment or for any valuable

consideration, the building and construction of any movable or immovable

property.

Land being immovable property is not liable for payment of sales tax. But

when any construction takes on land through an independent contractor

on behalf of the builder, contractor executing the work is liable to pay

works contract tax.

Dual Role of Developer

We may also visualise a situation where a builder himself acts as

contractor. In such situation the sales tax department considers the

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builder in dual capacity as contractor and as owner/builder. The

department is subjecting the builder to sales tax. The relevant case is

Mittal investments corporation Vs. State of Karnataka which was decided

by Honble high Court of Karnataka. It was held as follows;

If the building was first constructed and thereafter agreed to be

sold, then it was a sale of immovable property for which no sales

tax is attracted.

According to the agreement, some advance has been taken at the

time of executing agreement and the balance amount to be paid in

15 instalments

It has not been established that at the time of agreement, whether

construction has started by the builder.

The purchaser has to purchase the land from the purchaser and not

from the builder.

It is not clear whether plans were approved, before the execution of

agreement.

It was held that there is transfer of property in goods and liable for tax.

On review petition it was held, the builder would not be liable to pay sales

tax under section 5B in respect of buildings which have been completed

before entering into an agreement and also in respect of agreements

which have been entered after the construction of the building was

started. However, this was overruled by Honble Supreme Court in case of K. Raheja Development Corporation Vs. State of Karnataka

Inference

The question whether a particular contract is for sale of goods or contract

for work or labour is very difficult to determine. The distinctions and terms

specified by various courts are not exhaustive. They mainly dwell on one

or two points which have come in the cases, which are rigid and can be

made applicable to all cases. The deciding factor would be the contents of

contract, the circumstances of the transaction of the prevailing custom of

the trade.The levy of the works contract tax is on the materials used in

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execution of particular contract, the property which is ultimately

transferred.

Karnataka Sales Tax Act

The provisions relating to works contract under Karnataka Sales Tax Act

were inserted with effect from 01.08.1985 but were given effect from

1986.Section 2(29)(b) of KVAT Act deal with the Works Contract, which

refers to the property in goods involved in execution of works contract for

cash or deferred payment. Section 2(37) defines Works Contract as 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 movable or

immovable property.

The contractor has to include the sales tax in the quotation itself, so that

he can collect it from the principle and pay same to the Department, if not

he has to pay the sales tax on his own profit. The developer has to include

this clause in the agreement to sell and collect the tax from the purchaser

of flat and remit the same to the Commercial Tax Department.

A GUIDE TO SALES TAX ON APARTMENT BUILDINGSWork contractTypes of ContractsAgreement with BuilderDual Role of DeveloperInference