M/s. Larsen & Toubro Ltd. & ANR. Vs. State of Karnataka & ANR.
[Civil Appeal No. 8672 of 2013 arising out of SLP (C) No.17741 of 2007]
[Civil Appeal Nos. 8673-8684 of 2013 arising out of SLP (C) Nos. 30581-30592 Of 2009]
[Civil Appeal No. 8685 of 2013 arising out of SLP (C) No.17709 of 2012]
[Civil Appeal No. 8686 of 2013 arising out of SLP (C) No.17738 of 2012]
[Civil Appeal No. 8687 of 2013 arising out of SLP (C) No.21052 of 2012]
[Civil Appeal No. 8688 of 2013 arising out of SLP (C) No.21863 of 2012]
[Civil Appeal No. 8690 of 2013 arising out of SLP (C) No.26226 of 2012]
[Civil Appeal No. 8691 of 2013 arising out of SLP (C) No.476 of 2012]
[Civil Appeal No. 8692 of 2013 arising out of SLP (C) No.29143 of 2012]
[Civil Appeal No. 8693 of 2013 arising out of SLP (C) No.29145 of 2012]
[Civil Appeal No. 8695 of 2013 arising out of SLP (C) No.29146 of 2012]
[Civil Appeal No. 8696 of 2013 arising out of SLP (C) No.29147 of 2012]
[Civil Appeal No. 8697 of 2013 arising out of SLP (C) No.29148 of 2012]
[Civil Appeal No. 8698 of 2013 arising out of SLP (C) No.29149 of 2012]
[Civil Appeal No. 8699 of 2013 arising out of SLP (C) No.29151 of 2012]
R.M. LODHA, J.
1. Leave granted in all these special leave petitions.
2. 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 Rank a. 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 a fore stated 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."
3. 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 Toubro2. 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.
4. 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 wasrecorded.
5. On 21.12.2005, the Deputy Commissioner called upon L & T to furnish the details of development project. L & T furnished details on24.07.2005 and 26.09.2005.
6. 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.
7. 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.
8. 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 aswell.
9. 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/-.
10. 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.
11. 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 Development1 and, accordingly, dismissed the writ petition on10.07.2007 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."
12. 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."
13. Insofar as appeals from Maharashtra are concerned, they arise from the judgment of the Bombay High Court. The Bombay High Court was concerned with the group of matters wherein challenge was laid to the constitutional validity of Section 2(24) of the Maharashtra Value Added Tax Act, 2002 (for short, "MVAT Act") as amended initially by Maharashtra Act XXXII of 2006 and thereafter by Maharashtra Act XXV of 2007 and Rule58(1A) of the Maharashtra Value Added Tax Rules, 2005 (for short, "MVAT Rules").
14. The Division Bench of the Bombay High Court on examination of rival contentions has, inter alia, held;
a. works contract have numerous variations and it is not possible to accept the contention either as a matter of principle or as a matter of interpretation that a contract for works in the course of which title is transferred to the flat purchaser would cease to be works contract;
b. the provisions of MOFA recognise an interest of the purchaser of the apartment, not only in respect of the apartment which forms the subject matter of the purchase, but also an undivided interest, described as a percentage in the common areas and facilities;
c. the amendment to Section 2(24) clarifies the legislative intent that a transfer of property in goods involved in the execution of works contract including an agreement for building and construction of immovable property would fall within the description of a sale of goods within the meaning of that provision and it brings within the ambit of that expression "transactions of that nature" which are referable to Article 366(29-A)(b);
d. by amended definition of the expression "sale" in clause(b)(ii) of the explanation to Section 2(24), the transactions which involve works contract have been covered;
e. the amendment in Section2(24) does not transgress the boundary set out in Article 366(29-A);
f. Rule 58(1A) of the MVAT Rules provides that in the case of construction contracts where the immovable property, land or as the case may be, interest therein is to be conveyed and the property involved in the execution of the construction contract is also transferred, it is the latter component which is brought to tax; the value of the goods at the time of transfer is to be calculated after making the deductions which are specified under sub-rule (1); and (g) Rule58(1A) provides for a measure for the tax by excluding the cost of the land.
15. The Division Bench of the Bombay High Court, thus, found no merit in the challenge to the constitutional validity of Section 2(24) of the MVAT Act and Rule 58(1A) of the MVAT Rules. The trade circulars and the notifications were also found to be legal and consequently writ petitions were dismissed.
16. We have heard learned senior counsel and counsel for the appellants and learned senior counsel for Karnataka and learned Advocate-General and learned senior counsel for Maharashtra at quite some length.
17. Mr. Rohinton F. Nariman, learned senior counsel for L & T led the arguments on behalf of the appellants. His submission is that RahejaDevelopment1 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-I[3] 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' Association[4] and Bharat Sanchar[5]. 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.
18. 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.
19. 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 in as muchas 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 apurchaser.
20. Mr. Rohinton F. Nariman extensively referred to the decisions of this Court in B.C. Kame[6] and Hindustan Shipyard[7]. With reference to paragraphs 7 to 16, 22 and 24 to 26 in Hindustan Shipyard7, it is submitted that in a somewhat similar fact situation, this Court came to conclusion that construction of various ships for and on behalf of the customer would amount to a 'sale' and not to a 'works contract'.
21. 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 there for. It is, thus, submitted that the judgment in Raheja Development1 does not lay down good law and deserves to be over ruled.
22. Mr. K.V. Vishwanathan, learned senior counsel for Maharashtra Chamber of Housing Industries elaborately argued based on the following contentions. First, that to attract Article 366(29-A)(b) there has to be a "works contract" and in the process of executing the works contract if certain transfer of property occurs, such transfer would be deemed to be sale. If there is no works contract, the question of applying Article 366(29-A)(b) would not arise. A distinction is drawn between "works" and "works contract". It is contended that an agreement for sale is an agreement to transfer immovable property as an indivisible whole which will result in the execution of a conveyance. There is no element of works contract involved. Even if for the purpose of complying with the obligations of an agreement for sale, a vendor carries out some works, it is not on account of any works contract. Even if there are some "works" involved, there is no "works contract" between the promoter and purchaser.
23. Secondly, that the applicability of Article 366(29-A) read with Entry 54 of List II will arise only in matters which are otherwise not covered under the ambit of sale and cannot apply to an agreement for sale of immovable property resulting in a conveyance. He pressed into service
(i) test of enforceability
(ii) common parlance test (view of the reasonable man)
(iii) test of substance of the contract and (iv)assignment test. Insofar as common parlance test and test of substance of the contract are concerned, Mr. K.V. Vishwanathan placed reliance upon Bharat Sanchar5. As regards assignment test, paragraph 36 of the judgment in Builders' Association4 was referred to by the learned senior counsel.
24. Thirdly, that amended definition under Article 366(29-A) has not conferred on the States a larger freedom than what they had before the amendment in regard to their power to levy sales tax under Entry 54 of the State List. Paragraph 40 of the Builders' Association4 is relied upon. It is contended that an agreement to sell entered into between the promoter and purchaser continues to remain an agreement to sell and the provisions of MOFA does not change the nature of such agreement. Reference is made to the decision of this Court in Nahalchand Laloochand[8].
25. And fourthly, that if State's submissions are accepted, Article366 (29-A)(b) has to be read as "a tax on the transfer of property (whether as goods or in some other form) involving works" which will not only distort the amendment but will render the words "in goods" redundant. Article 366 (29-A)(b) does not provide for such an interpretation. The phrase "in some other form" takes its colour from the preceding words namely, "transfer of property in goods" and "whether as goods". The said phrase "in some other form" cannot and would not mean the transfer of an indivisible immovable property as a whole. Reliance is placed on the decision of this Court in Purshottam Premji[9] to differentiate between a sale and works contract. It is contended that the distinguishing factors that have been laid down in Purshottam Premji9 which were relied on by the Law Commission should be considered as the only tests to differentiate a works contract and a contract for sale.
26. Dr. Abhishek Manu Singhvi, learned senior counsel appearing for Promoters and Builders Association made brief oral submissions which were followed by detailed written submissions. The principal issue, according to him, is, whether the agreement entered into between a promoter/developer and a flat purchaser, pursuant to the provisions of Section 4 read with Rule 5 and Form V of MOFA can be divided into two parts,
(i) an agreement between the promoter/developer and the flat purchaser to construct a flat; and
(ii) an agreement between the promoter/developer and the flat purchaser to eventually sell the flat so constructed and whether the first part of the said agreement can be treated as a works contract whereby the flat purchaser is accorded the status of a principal employer and the promoter/developer acts as a mere contractor for him and constructs the flat for and on behalf of the flat purchaser.
While conceding that an integral part of the transaction of sale of a flat is the activity of construction of the said flat but the moot question in his view is whether such activity of construction has the characteristics or elements of works contract. Learned senior counsel highlighted the distinguishing features between "works contract" and "contract for sale of goods" and having regard to that it is submitted that the activity of construction undertaken by the promoter/developer cannot be said to be works contract for the reasons,
(i) that developer does not construct at the behest of the flat purchaser as on various occasions the flat is constructed without there being any booking for the said flat;
(ii) the main intention of the agreement between the promoter/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;
(iii)the flat purchaser does not have any role in conceptualizing the project of construction nor does he have any say in the designing and lay-out of the building to be constructed. The flat purchaser does not have any control over the type and standard of the material to be used in the construction of the building. He does not get any right to monitor or supervise the construction activity;
(iv) the ownership in the material used in the construction remains with the promoter/developer and the said ownership passes to the flat purchaser only on the eventual conveyance of the flat;
(v) the accretion to the goods happens in the hands of the promoter/developer and not when the flat is conveyed to the flat purchaser; and
(vi) the construction linked payment schedule is nothing but a method of payment in installments.
27. It is the submission of Dr. Abhishek Manu Singhvi that Article366(29-A)(b) by a deeming fiction only deems the transfer of property in goods in execution of a works contract as a sale but the said amendment does not contemplate a deemed transfer of goods which actually does not happen at the time of execution of the contract. The provisions of MOFA do not change the character of the transaction entered into between the promoter/developer and the flat purchaser from that of a pure sale of immovable property to a works contract. Even in the absence of a statute like MOFA, the obligations and restrictions prescribed therein would still be present as part of obligations under the Indian Contract Act/Transfer of Property Act and its penalties for breaching the same would still be applicable under the penal statutes.
28. While referring to Section 2(24) MVAT Act, it is submitted by the learned senior counsel that a plain reading of amended explanation b(ii) to Section 2(24) of that Act will show that the said provision has not brought within its scope transactions which are not in their substance works contract. The amendment brought in explanation b(ii) to Section 2(24)is merely explanatory in nature. Even after the amendment the transaction in which there is transfer of property in goods has to be works contract. The amendment cannot be interpreted to mean that transfer of property in goods in execution of any agreement even if it is not a works contract has now been included in the definition of sale. Such interpretation will render the provision unconstitutional. Learned senior counsel submits that the manner in which the State Government is expanding scope of Section2(24) on the basis of the decision of this Court in Raheja Development1, it has rendered the said provision unconstitutional. According to Dr. Abhishek Manu Singhvi, Raheja Development1 therefore needs to be reconsidered andoverruled.
29. As regards constitutional validity of the provisions of Rule58(1) and 58(1A) of MVAT Rules, it is submitted that these Rules and Rule58(1-A) of the 2005 Rules include an element of profit earned by a promoter/developer on the sale of a flat. There are no provisions to take the profit element from arriving at the value of goods. As a result income earned by the promoter/developer from the profit on sale of the flat also gets included in the value of goods and eventually the said income gets taxed. Imposition of such tax on the income of the promoter/developer is beyond the legislative competence of the State Government.
30. Without prejudice to the above arguments, it is firstly submitted that assuming that the activity of construction undertaken by the developer is a works contract then the same would be a works contract only from the stage when the developer enters into a contract with the flat purchaser. Only the value addition made to the goods transferred after the agreement is entered into with the flat purchaser can be made chargeable under MVAT Act. VAT cannot be charged on the entire sale price as described in the agreement entered into between developer and flat purchaser as sought to be done under the composition scheme. Secondly, it is submitted that assuming that the agreement entered into between the developer and the flat purchaser has two components, namely, a works contract and sale of proportionate share in the land then the stamp duty on such transaction should be levied under Article 25 (stamp duty for conveyance) only on the component sale of proportionate share in the land and the stamp duty on the value of construction carried out ought to be charged under Article 63(stamp duty for works contract).
31. Mr. N. Venkatraman, learned senior counsel for Builders Association while highlighting the background in which clause (29-A) came to be inserted in Article 366 and drawing distinction between a conventional sale and a works contract submits that 'transfer' is imminent and indispensable requirement in both but in the case of a conventional sale, property in goods gets transferred as intended by the parties while in a works contract, property in goods get transferred through accretion. Few illustrations have been referred to by him and it is submitted that 'test of accretion' which is sine qua non for works contract is not satisfied in the agreements under consideration. L & T II[10] is referred which says, "once the work is assigned by L & T to its sub-contractor, L & T ceases to execute the works contract in the sense contemplated by Article366 (29-A)(b) because property passes by accretion and there is no property in goods with the contractor which is capable of a re-transfer whether as goods or in some other form".
32. Learned senior counsel contends that when ultimately the constructed flat is transferred or sold, it becomes a sale of an immovable property at which point of time the question of transfer on accretion does not arise. The transfer of goods has to take place in the course of the construction of a building before becoming an immovable property though the contract may be indivisible contract for construction of a building in the form of an immovable property. Once it becomes an immovable property, Article 366(29-A)(b) cannot be pressed into service to such a transaction. He submits that an agreement to sell is not a sale in its conventional sense and, therefore, cannot be a deemed sale also.
33. It is submitted by Mr. N. Venkatraman that Section 2(24) of MVAT Act and Rules 58 and 58(1A) of MVAT Rules seek to redefine the taxable event by moving away from theory of accretion to transfer of immovable property by way of conveyance and that renders these provisionsun constitutional.
34. Mr. Vinod Bobde, learned senior counsel appearing on behalf of Promoters and Builders Association, Nasik argues that after insertion of clause 29-A in Article 366, the works contract which was an indivisible one has by a legal fiction altered into a contract which is divisible into one for sale of goods and the other for supply of labour. Thus, the goods component is exigible to sales tax. However, the amendment has not enlarged the meaning of "works contract" as commonly understood. With reference to Section 2(24) explanation (b)(ii) of the MVAT Act, learned senior counsel submits that this provision aims at taxing the sale of goods involved in the execution of a works contract. In the case of a building contract on land, the contractor must be carrying out the building activity for consideration which obviously means that he should be receiving consideration from the person who has engaged him as contractor. The provision does not cover an owner or developer of land who is constructing a building for the purpose of ultimately selling the flats therein to purchasers. Such owner or developer does not receive any consideration from anyone for carrying out of the building activity; what he receives is simply the sale price of the flats from the purchasers. According to Mr. Vinod Bobde, the provisions so read would not transgress Article 366 (29-A) but if it is read as was done in Raheja Development1, it would be unconstitutional.
35. It is argued by Mr. Vinod Bobde that an agreement of sale whether simplicitor or in Form V under the MOFA is not a "works contract". It only settles terms for the sale of property and the sale ultimately takes place in pursuance thereof unless the contract is terminated. The "works" component and "goods" component are totally absent in the agreement. There is no question of taxing sale of goods in an agreement of sale. The buyer does pay the sales tax on the purchase of goods/material used in construction of the building. Such goods/materials are purchased from the dealers registered under the Act. What the taxing authorities seek to do by treating an agreement for sale of immovable property, namely, flat to be a "works contract" within the meaning of Section 2(24), explanation(b)(ii) is to again tax the goods used in the construction of the building. This cannot be done because the builder is not building as the contractor for the flat purchaser but for himself, and he cannot possibly transfer such goods to himself.
36. Mr. Vinod Bobde submits that the High Court's view that the element of sale of immovable property can be there in a works contract is clearly erroneous. The agreement of sale in Form V under the MOFA is not an agreement simpliciter and the aspect that MOFA creates the right and interest in the flat as a measure for protecting prospective flat purchasers is irrelevant. With reference to Entries 25, 5 and 63 of the Bombay Stamp Act, 1958 which provide for stamp duty on conveyance including an agreement for sale of property, agreement or its record or memorandum of agreement and works contract respectively, it is submitted that State has been levying stamp duty on agreement of sale under Entry 25 and not under Entry 63 and hence the State does not consider an agreement for sale to be a works contract.
37. Mr. Shivaji M. Jadhav learned counsel appearing for one of the appellants has broadly followed the above submissions. He submits that expression "in some other form" in Article 366(29-A)(b) does not mean immovable property but some other form of goods being movable property. According to him, artificial rules or other enactments like MOFA, Bombay Stamp Act would not be relevant at all in ascertaining whether transfer of property in goods has taken place in the execution of works contract. Model agreement Form V in MOFA does not indicate that construction of a flat by the developer/promoter is being carried on for and on behalf of the purchaser of the flat. Rather it supports the view that buyer is interested in what is constructed as a flat and not the building material. MOF A ensures that the theory of accretion is not applicable and the flat purchaser is not left at the mercy of the builder.
38. Learned counsel also submits that if Section 2(24) explanation b(ii) of the MVAT Act is read in the manner suggested by this Court in Raheja Development1, such provision is rendered unconstitutional. As regards Rule 58(1) and Rule 58 (1-A), the submission of the learned counsel is that these Rules suffer from various infirmities and are unable to carry out the objectives of MVAT Act.
39. 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 Development1 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 Article366(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-I3 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'Association4, that definition of 'works contract' KST Act does not go beyond what is contemplated in the Constitution.
40. Mr. K.N. Bhat's submission is that in order to sustain levy of sales tax on the goods deemed to have been sold in the execution of works contract the following conditions are to be met, (a) there must be works contract, i.e., any contract to do construction, fabrication and the like;(b) the goods deemed to have been sold should have been involved in the execution of a works contract; and (c) the property in those goods must be transferred to a third party either as goods or in some other form. The taxable event is deemed sale. It is irrelevant whether transferee was a party to the works contract. All that is required to be enquired into is as to whether the goods were involved in the execution of the works. By Forty-sixth Constitutional Amendment, the effect of Gannon Dunkerley-I3 has been neutralized. Now that the works contract which was indivisible according to Gannon Dunkerley-I3 are divisible and the goods involved in the execution of works contract that were then not taxable are now taxable.
41. The whole idea by insertion of clause 29-A(b) in Article 366,Mr. K.N. Bhat submits, is to make the materials used in the building activity liable to sales tax. Any other interpretation will be contrary to the two decisions of the Constitution Benches in Builders' Association4 and Gannon Dunkerley-II[11]. So construed works contract simply means a construction activity. If the building is retained by the builder himself, there is no deemed sale.
42. Mr. K.N. Bhat, however, submits that the statement of law in Raheja Development1 that when a completed building is sold, there is no works contract and, therefore, no liability to tax, may not be correct statement of law. If the building was intended for sale and is in fact sold, tax is attracted to the deemed sale. Even in such cases, goods used in the construction are deemed to have been sold by the builder (dealer)to the purchaser.
43. It also urged by Mr. K.N. Bhat that in the referral order, the Bench has entertained certain doubts in respect of the decision of this Court in Raheja Development1 . However, such doubts that a better view was possible is not good enough to reconsider the decision. Relying upon decisions of this Court in Gannon Dunkerley-II11 and the earlier decision in Keshav Mills[12], he submits that while recommending reconsideration of an earlier decision, the Bench must first come to the conclusion that the earlier decision was clearly wrong for the reasons stated. According tohim, within the settled standards, recommendation to consider RahejaDevelopment1 does not fall. Moreover, since Raheja Development1 in May,2005 almost all States have modified their laws in line with RahejaDevelopment1 and the need for change in a settled practice is not made out.
44. Mr. Darius Khambata, learned Advocate General and Mr. Shekhar Naphade, learned senior counsel advanced arguments on behalf of Maharashtra. It is argued that after insertion of Article 366 (29-A)(b) in the Constitution, the transfer of movable property in a works contract is deemed to be sale even though it is not a sale as per the Sale of Goods Act. The works contract is now divisible. Article 366(29-A)(b)clarifies that the transfer of the goods may be as goods or in some other form. Therefore, the goods may remain as goods or cease to be goods, i.e., they may merge into immovable property. In this regard, extensive reference has been made to Builders' Association4 and it is submitted that the same submissions made by the States which were rejected by this Court in Builders' Association4 are now sought to be raised almost on similar lines by the appellants which have been rightly rejected by the High Court.
45. Learned Advocate General and learned senior counsel for Maharashtra submit that the term "works contract" is nothing but a contract in which one of the parties is obliged to undertake or to execute works. The expression "works" is extremely wide and can either mean the act of bestowing labour or that on which the labour is bestowed. In this regard, the two decisions of this Court (i) Dewan Joynal Abedin[13] and (ii)Kartar Singh[14] have been referred. It is submitted that the term "works" would include the final product and, therefore, a works contract cannot be confined to a contract to provide labour and services but is a contract for undertaking or for bringing into existence some "works". Nothing in Article366(29-A)(b) limits the term "works contract". Although, works contract usually have only two elements, i.e., labour and services as well as sale of goods but the addition of few other elements does not denude such contract being works contract. It is possible that there could be a works contract coupled with the sale of immovable property. The transaction does not cease to be a works contract merely because it may include other obligations.
46. Learned Advocate General argues that even in the case of a works contract, the ownership of the goods need not pass only by way of accretion or accession to the owner of the immovable property to which the yare affixed or upon which the building is built; property can pass under the terms of a contract or by statute. He submits that the tests laid down in judgments prior to Forty-sixth Constitutional Amendment for determining whether a contract is a works contract or a sale of goods are no longer applicable. There is no question of ascertaining the dominant intention of the contract now since the sale of goods element is a deemed sale under Article 366(29-A)(b) and can be taxed separately. Hindustan Shipyard7 was distinguished and it was submitted that in Associated Cement[15] a three-Judge Bench of this Court has overruled the decision in Rainbow Colour Lab[16] and it has been expressly noted that cases such as HindustanShipyard7 relate to the situation prior to Forty-sixth Amendment where the court had no jurisdiction to bifurcate a works contract and impose sales tax on the transfer of property in goods involved in the execution of the contract. Reference was also made to a decision of this Court in P.N.C. Construction[17]. According to learned Advocate General, it has now become possible for the States to levy sales tax on the value of the goods involved in the works contract in the same way in which the sales tax was leviable on the price of the goods supplied in a building contract. This is where the concept of "value addition" comes in. It is on account of Forty-sixth Amendment to the Constitution that the State Government is empowered to levy sales tax on the contract value which earlier was not possible.
47. Mr. Darius Khambata submits that a composite contract comprising both a works contract and a transfer of immovable property does not denude it of its character as a works contract. According to him, Article 366(29-A)(b) provides for a situation where the goods are transferred in the form of immovable property. He referred to an Australian case, M.R. Hornibrook[18] in this regard which has been approved by this Court in Builders' Association4.
48. Learned Advocate General has also pressed into service the aspect theory of legislation. His submission is that different aspects of the same transaction can involve more than one taxable event. There is nothing to prevent the taxation of different aspects of the same transaction as separate taxable events. This would not constitute as plitting of an indivisible contract. Reference is made to a decision of this Court in Federation of Hotel & Restaurant[19]. The submission of the learned Advocate General is that transfer of immovable property cannot be taxed as a sale of goods but there is no constitutional bar to tax only the sale of goods element and separately tax the transfer of immovable property. Taxing the sale of goods element in a works contract under Article 366 (29-A)(b)read with Entry 54 List II is permissible, provided the tax is directed to the value of the goods and does not purport to tax the transfer of immovable property.
49. Stoutly defending the impugned judgment of the Bombay High Court, learned Advocate General submits that Section 2(24) explanation b(ii) of MVAT Act has been rightly held to be constitutional as the provisions in the MVAT Act offer diverse options for valuation of the sale of goods element in a works contract. Each of these options is consistent with the methods approved of by this Court in Gannon Dunkerley-II11.
50. As regards challenge to the constitutional validity of Rule 58Aand Rule 58(1A), it is submitted by learned Advocate General that these provisions are consistent with the principles laid down in Gannon Dunkerley-II11. The measure of tax is not determinative of its essential character or of the competence of the legislature. He sought to dispel the impression that Rule 58(1A) may result in double taxation. Distinguishing the decision of this Court in Larsen & Toubro-II[20], learned Advocate General submits that the observations made in para 19 does not apply to Maharashtra inasmuch as Section 45(4) of the MVAT Act ensures that it is either the builder or the sub-contractor who pays the tax (being treated as one and jointly/severally liable). In any case all claims of alleged double taxation will be determined in the process of assessment of each individualcase.
51. Highlighting the MOFA agreement in prescribed Form V, learned Advocate General argues that the clauses therein indicate that it comprises of a works contract along with the agreement for sale. There is no reason to deny the applicability of Article 366(29-A) to such a works contract. His argument is that sale of goods element in the works contract contained in a MOFA agreement is taxable under Section 2(24) explanation b(ii) of the MVAT Act. As long as there is an obligation to construct under the agreement between the promoter and the flat purchaser (in the case of Maharashtra being an agreement under the MOFA) the deemed sale of goods involved in the execution of such a works contract can be taxed even after incorporation of the goods in the works and when the property passes as between the promoter and the flat purchaser. It is submitted that what is at issue before this Court is not the determination of when the taxable event takes place but the exigibility to tax of a deemed sale of goods in a composite contract.
52. 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 47contracts 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 credit, 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......."
53. 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 itas 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, 1935was 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.
54. The problems connected with powers of States to levy tax, interalia, on goods involved in execution of works contract following GannonDunkerley-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.
55. Having regard to the above recommendation of the Law Commission, the Constitution Bill No.52 of 1981 was introduced in the Parliament.
56. *The Parliament then enacted the Constitution (Forty-sixth Amendment) Act, 1982 which received the assent of the President on02.02.1983. Accordingly, clause 29-A was inserted in Article 366 of the Constitution which is set out as below.*
57. *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 366of the Constitution as well as the amendments made in the State legislations were challenged in Builders' Association4. The 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.
58. 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.
59. 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 anddocuments".
60. 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 clause29-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.
61. 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.
62. 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.
63. Gannon Dunkerley-I3 and few other decisions following GannonDunkerley-I3 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' Association4. As a result of clause 29-Aof 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 Forty-sixth 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.
64. 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 n 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 Lab16 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 Lab16 has been expressly overruled by a three-Judge Bench in Associated Cement15.
65. Although, in Bharat Sanchar5, 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 3
66. 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-I3 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-I3 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, with in the ambit of purchase or sale for the purposes of levy of sales tax.66. It then clarified that Gannon
