1.1 Articles on VAT: 1.

2 INTRODUCTION OF WORKS CONTRACT:

by T. M. Chhatpar The taxation of Works Contract had never been clear and simple. It was always surrounded by uncertainty. Whenever the States tried to levy tax on a transaction which did not involve Transfer of Property in a chattelqua-chattel it was objected to by the tax-payer, as the term sale as understood under the Sale of Goods Act, 1930 did not include composite transactions of supply of goods and labour. Further, there was no precise definition of the term Works Contract and therefore one had to look to the interpretation of the term Works Contract made by the various courts in their judicial pronouncement. Since in every sale and purchase there is transfer of property backed up by an agreement to transfer property. The intention of the parties is to be gathered from the terms and conditions of the agreement or the contracts. Therefore from the analysis of the contract the intention of the parties is to be gathered and the contract is required to be classified accordingly. There can be various contracts in which there can be a transfer of property in goods but each one of them cannot be a contract of sale as understood under the Sale of Goods Act, 1930. There can be various contracts in which there is a Transfer of Property in goods yet these may not amount to a contract of sale.

1. TYPES OF CONTRACTS INVOLVING TRANSFER OF PROPERTY IN GOODS The first important judicial pronouncement is in the form of Supreme Court decision in the case of Government of Andhra Pradesh vs. Guntur Tobacco Ltd. (16 STC 240). In this decision the Supreme Court has explained the types of contract in which there is a transfer of property. According to the Supreme Court there are 3 types of Contract where material is used: (i) The contact may be for work to be done for remuneration and for supply of material used in the execution of a work for a price. (ii) It may be a contract for work in which use of material is incidental or accessory. (iii) The last in which use of material is voluntary or freely given. In the last type of contract there is no difficulty to say that there is no sale because even if property passes it is without any price. In the first case there is a composite contract for work and sale of goods and in the second type of work it is a contract for execution of works not involving sale of goods. Thus where there is a contract in which there is transfer of title to the goods expressly or impliedly and not as incidental to the contract it is a Works Contract. However, where the contract is for work in which there is transfer of property in material but it is just incidental or accessory to the main contract then such transfer of property cannot be taxed under the Works Contact Act as the predominant object of the parties was to get the services and not to buy or sale any goods. Such contract was referred to as Service Contracts. There can be many examples of Service Contracts wherein there is a transfer of property in goods involved in the execution of a work where in such transfer of property was not intended by the parties to the contract. The property passes in such contract only as incidental to the contract for the simple reason that the primary object of the party was to give and take services. An example can be that of a photographer. A person going to the photographer is not interested in purchase of the paper on which photograph is printed but is interested in the skill of the photographer though in such case there is a transfer of property, the property passes only as incidental transfer. A useful reference can be made in this regard to the case of M/s. B. C. Kame (39 STC 237). Another example of Service Contract could be that of a radiologist giving written opinion. The same will be a case with the painters and consultants. 2. POSITION AFTER 46th CONSTITUTIONAL AMENDMENT To overcome the effect of certain judgements the Constitution was amended. The amendment is known as the 46th Amendment which took place in the year 1983. After 46th amendment, in Article 366, Clause (29A) was inserted; which reads as under:

(29A) tax on the sale or purchase of goods include (a)...., (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)..., (d)..., (e)..., (f)..., The objective behind introducing sub-clause (b) was to enable the States to levy tax on sale or purchase of goods where such sale/purchase of goods is by way of transfer of property in goods involved in the executions of Works Contract. Now a question arises as to whether after this amendment can the Service Contract; i.e., where the Transfer of Property in Goods involved in the Execution of a Contract is only incidental or ancillary and was not intended to be purchased and sold by the parties can be taxed? In my humble opinion, Service Contract cannot be taxed even after the 46th amendment in the Constitution because the predominant object theory still holds goods. A contract of sale or purchase of goods has to be with knowledge of the parties and with a clear objective in mind for transfer of property in goods involved in the execution of a particular contract where the parties to a contract did not intend the transfer of property in goods in the execution thereof there can be no sale or purchase of goods. SARVODAYA PRINTNG PRESS CASE (114 STC 240): In this case the Supreme Court was dealing with a printing contract. It was held to be a Works Contract. While holding so the court has noted the observations made by it in the case of State of Tamilnadu vs. Anandan Vishwanathans case in following words: In our opinion the contract in this case is one, having regard to the nature of the job to be done and the confidence reposed for work to be done for remuneration and supply of paper is just incidental. Thus the Supreme Court did not describe the transaction before it as a Works Contract to be executed for a payment of contract price. The Supreme Court held that the case before it having regard to the nature of the job to be done and the confidence reposed was for work to be done for remuneration and supply of paper was just incidental. Thus in the view of the Supreme Court also service contract do exist even after the 46th Constitution Amendment and such Service Contract cannot be subjected to tax under the Works Contract Tax Act. RAINBOW COLOUR LABs CASE (118 STC 9): The Supreme Court in the case of Rainbow Colour Lab vs. State of Madhya Pradesh (118 STC 9) has observed that all that has happened in law after the 46th amendment following the judgement of this court in builders case is that it is now open to the State to divide the Works Contract into two separate contracts by a legal fiction. (i) Contract for sale of goods involved in the said Works Contract. (ii) For supply of labour and service. This division of Works under the amended law can be made only if the Works Contract involved dominant intention to transfer the property in goods and not any contract where the transfer of property is as an incidence of contract of service. The amendment referred to above has not empowered the State to indulge in microscopic division of contract involving the value of material used incidentally in such contract. What is pertaining to ascertain in this connection is what was the dominant intention of the contract, every contract, be a Service Contract or otherwise, may involve the use of some material or the other in execution of the said contract. The State is not empowered by the amended law to impose Sales Tax on such incidental material used in such contract. From the above observations of the Supreme Court the jobs like Xeroxing, cyclostyling, pest control etc. will not be covered by Article 366 (29A) sub-clause (b). 3. DETERMINATION OF PREDOMINANT INTENTION To judge the predominant intention of the parties to a contract also poses difficulty. Where the contract is in black and white then the terms of the contract may throw light on the dominant intention of the parties. But were there is no clear contract then the nature of work to be done, the monetary value of the goods in which there is a transfer of property, the common parlance will help in knowing the intention. All these tests cannot be applied independently and their application will depend upon the facts and circumstances of each case. In the case of purely artistic work such as photography, painting etc. it is easy to understand the predominant intention of the parties and there is no difficulty in saying that predominant intention of the party is to have the service of the photographer. Nobody is interested in buying the paper on which the photograph is printed. However, in case of a printing contract if the contractee has given the specification regards the paper on which the matter given by him should be printed and the paper is of such a type that it is not used ordinarily by printers in general

then definitely it can be inferred that the parties intended to buy and sell paper on which the matter is printed. In such case the printer also fixes his charges accordingly by taking into consideration the cost of paper involved. The third case can be that of the monetary value of the goods in which there is a transfer of property. In the monetary value of the goods in which there is a transfer of property is of considerable high value it can be inferred that there is a transfer of property in goods involved in the execution of a works contract. In determining whether there is a transfer of property in goods involved in the execution of a works contract or not one may adopt the reasoning given by the Courts and the Tribunal while inferring deemed sale of packing material under the Sales Tax Law. For example in the case of Dhariwal Bottles Ltd., vs. The State of Maharashtra (99 STC 326) it was held by the Court that no deemed sales of empty gunny bags would be inferred which were used to pack empty bottles for transportation as such packing material was commonly used as a cheap and convenient mode of transportation. Therefore here the practices followed in common parlance were taken into consideration. Similar, in the case of Vidarbha Bottlers Ltd. the Tribunal had held that a deemed sale of packing material (glass bottles) in which the liquor was packed would be inferred as the value of glass bottles was significantly high or form an substantial component of cost of liquor. However, the Rainbow Colour Labs case strengthened the concept of Service Contract. Supreme Court decision in case of Associated Cement Ltd. (124 STC 59) (ACC) unsettled the already settled position. In this case the division bench of 3 judges was examining the levy of custom duty on imported diskettes/paper/floppy etc. under the Custom Act. M/s. ACC and others had obtained technical knowhow from foreign experts. The foreign experts sent their opinion/advice on media like floppy/drawing paper/diskettes. The assessee declared nominal value of 1 dollar for the purpose of custom duty. Though they had paid a huge amount towards consultation fees. The Custom Authority however, imposed the custom duty on full amount paid by the importers. The Supreme Court held that the foreign experts sent the floppy/papers only on getting their fees and hence the entire fee is liable to custom duty. For the above purpose the Supreme Court took into consideration the definition of goods defined under the Customs Act, 1962 which is totally different from the definition of goods under the Sales Tax Laws so also the definition of custom value is different from the sale price and the turnover of sales under the Sales Tax Laws. The Supreme Court resolving the above controversy observed that the case under the Sales Tax Legislation is not of any relevance to the controversy under the Custom Act. However, observed as follows: Even though in our opinion the decisions relating to levy of Sales Tax would have, for reasons to which we shall presently mention, no application to the case of levy of customs duty, the decision in Rainbow Colour Lab (118 STC 9) (SC) requires reconsideration. The Supreme Court then further observed that The conclusion arrived in Rainbow Colour Lab (2000) (118 STC 9) (SC) in our opinion runs counter to the express provisions contained in Article 366(29A) as also of constitution bench decision of this Court in Builders Association of India vs. Union of India (73 STC 370). Also Supreme Court observed that Apart from the decision in Rainbow Colour Labs case (118 STC 9) (SC) which does not appear to be correct, the other decisions cited relating to pre 46th amendment period. Thus, except observation that the judgement runs counter to the constitution or appears to be not correct, Supreme Court has not held further so as to declare it invalid or they have stated clearly that the judgement in Rainbow is overruled. Therefore, it can be said that Supreme Court in the above case has expressed doubts but certainly not overruled the judgement, as it has not examined the judgement of Rainbow Colour Lab on merits. The observations made by the Supreme Court in the judgement is said to be only an obiter dicta (passing remarks). 4. HAS THE ACC CASE CLOSED ALL THE DOORS? A question may arise whether the judgement of the ACC has put a last cap on the entire issue or there is still a ray of hope in the matter. In my humble opinion since the decision of ACC has not overruled expressly the decision of Rainbow Colour Lab there is still a chance of review of ACCs decision by the Supreme Court. One may see that something comes out of the decision of larger bench in the case of M/s. Tata Consultancy vs. The State of Andhra Pradesh (122 STC 198) which was referred to the larger bench of the Supreme Court by division bench. In this case also before the division bench the decision of ACC was cited. Had the Supreme Court considered that ACCs case has taken the matter to the finalising then that would have definitely followed

it and decided the controversy regarding computer software which was referred to them for their opinion. Thus it may be inferred that the Supreme Court also feels that the ACCs decision requires a rethinking. 5. MATUSHREES DECISION BY BOMBAY HIGH COURT Matushree Textiles Ltd. (132 STC 539) has completely negatived the concept of Service Contract. In this case the Bombay High Court was dealing with a case of a dealer engaged in the business of dyeing, bleaching and printing of grey fabrics received from customers. For the purpose of dyeing, bleaching and printing the respondent used material such as colours, dyes and chemicals and these materials were converted into a solution and stored in a tank. Thereafter grey fabric was passed through the solution several times till the requisite colour shade was obtained on the fabrics as per the specification of the customers. The dyed fabric was washed by water to drain away the chemical solution remaining on the fabric. On completion of the job work the dyed/printed fabrics with the requisite colour shade were returned by the dealer to the customers. It was held by the court that in the above contract the dominant intention of the party is to transfer the requisite colour shade/print on the fabric supplied by the customers. How the coloured shade/print is to be passed to the fabrics and what ingredients or material should be used for obtaining the requisite colour shade/print may not be specified in the contract. In the present case, the colour shade was passed to the fabrics due to the chemical reaction of the material used in the process of dyeing. The colour shade represents the inherent chemical property of the material used. Once there is passing of the chemical property of the material used in the execution of Works Contract, then under the Maharashtra Works Contract Act there is a deemed sale of the material used in the execution of the Works Contract. Such passing of property of the material was a deemed sale and tax was leviable on such material under the Maharashtra Works Contract Tax Act. While holding so the Bombay High Court discussed the decision of M/s. RMDC Press (112 STC 307) wherein it was held that in a printing contract the ink is a tool of printer and the same is consumed in the printing and loses its identity as goods and therefore no property can be said to pass in ink used in the execution of the contract of printing. Bombay High Court held that the decision of RMDC Press was without considering the first bench decision of Sarvodaya Printing Press (93 STC 387) which has been upheld by the Apex Court. Once it is held that the property in goods used in the execution of the Works Contract passes incidentally or by theory of predominant intention such passing, though not a sale under BST Act would be deemed sale under the Works Contract Act. The Bombay High Court has also disregarded the theory of predominant intention, the value or the quantity of the material in which there is a transfer of property so also the passing of property in physical form to attract the Works Contract Tax. Therefore, after the Matushrees decision it appears that practically the predominant intention theory and the concept of Service Contract will lose its importance under the Works Contract Tax Act. The Government of Maharashtra has already started taking steps following the decision of the ACC and has taken out a trade circular No. 18T of 2001 dtd. 26-9-2001 wherein the Commissioner has clarified that after the Supreme Court decision in the case of ACC vs. Commissioner of Customs. The Departmental Authorities were instructed to follow the ACCs case and to assess all like cases accordingly. However, it was also stated that the closed matters will not be re-opened. Following the said circular the Departmental Authorities started taking step for getting the printers, photographers, person engaged in dyeing and bleaching to get registered. The matter was then taken to the Government and the Government of Maharashtra took out Government Resolution No. STA-11.03/CR/197/Taxation-1 dtd. 7-8-2004 whereby it has now been provided that the dealer processes cloth and developing photographs will be granted administrative relief of tax liability for the period up to 31-32004 and interest and penalty of such tax will not be recovered. However, where tax has been partly collected or paid the administrative relief will be restricted only to the amount of tax not recovered/not paid. Similarly, in the hands of dealer engaged in printing, all case which were closed prior to 11-8-1998 will not be reopen. The powers of granting administrative relief have been given to the Commissioner which can be delegated further. 6. Paper cannot be concluded without taking cognisance of the implications of the latest decision of our own High Court in the Writ Petition No. 873 of 2004 pronounced on 6th March, 2004 in the case of M/s. Maharashtra Mudran Parishad and Ors. vs. The State of Maharashtra. In this case members of Printers Association who were undertaking jobs of printing on the paper supplied by their customers, who were served with the Notices of assessment by the department proposing to levy tax under the provisions of the Maharashtra Transfer of Property in Goods involved in the execution of the Contract Act, 1989 on alleged transfer of ink and other consumables used in the jobs of printings, had approached the Court for quashing of the Notices and the Trade Circular issued by the Commissioner of Sales Tax on the basis of which Notices were issued, as their cases were live as on 11-8-1998. Petitioners had relied on the following rulings in support of their plea that there is no transfer of property in ink and consumables in the jobs of

printing in the contracts which were service contracts and passing of property if any is merely incidental and not intended at all: 1. R.M.D.C. Press (112 STC 30) 2. M/s. Rainbow Colour Lab & Others (118 STC 9 S.C.) Respondents on the other hand had relied on the following judgments: 1. Sarvodaya Printing Press vs. State of Maharashtra (93 STC 387) as approved by the Supreme Court There is transfer of property in ink. 2. Associated Cement Companies Ltd. vs. Commr. of Customers (124 STC 59) Rainbow Colour Lab is no more good law as the same is over ruled by this judgment. 3. Matushree Textiles Ltd. (132 STC 539) Transfer of property in colours and chemicals in the changed form of shade in the job of printing and dyeing of cloth. High Court after considering rival submissions, in para 11 has held as under which is important: It goes without saying that in each case the nature of the contract and transaction has to be seen. This is possible only when the intention of the parties that too dominant intention is found out. The fact that in the execution of the contract for work some materials are used, and the property/goods so used, passes to the other party, the contractor undertaking to do the work will not necessarily be deemed on that count, to sell the materials. Whether or not and which part of the job work relates to that depends as mentioned hereinabove on the nature of the transaction and what is dominant intention which has to be found out in each case in the light of its own facts. As the Writs were filed against the Notices and Assessments were yet to be taken up, the High Court dismissed the Writs but with the following directions to find out the dominant intention between the contracting parties: The concerned members of the Petitioners Association whose assessments proceedings have been initiated or likely to be initiated on the basis of Trade Circular, shall be free to raise all contentions including the applicability of the Act of 1989 and or otherwise also whether the judgment of this Court in the Matushree Textiles Ltd., could be attracted or not on the facts of the concerned case. Obviously, in the said assessment proceedings, the concerned officer shall scrutinise the nature of the contract and find out the dominant intention between the contractor and the customer. Thus matters of printers doing job work of printing using ink on the paper supplied by their customers were kept open and not held as concluded on the basis of Matushree Textiles judgment in which R.M.D.C. Press Judgment of the Bombay High Court has been held as per incuriam. From the above judgment of the High Court, ratio once again emerges that dominant intention has to be found in each case about intention to pass property in goods and because incidentally or ultimately property in some goods passes, there is always liability to Works Contract Tax on that count of transfer of property whether intended or not is not a good law. Thus even in cases of printers using ink, there can be cases where there may not be transfer in property in ink whereas in some other cases there may be transfer of property in ink. Thus even Matushree is not the last word so far some bald propositions stated in the judgment. Thus some latter judgment of printing press arising from assessment proceedings before High Court may settle the issue. It is further understood that High Court has admitted the Writ filed by M/s. Balkrishna Industries who were also doing job work of dyeing and printing textiles and granted stay of the recovery of tax demanded by the Department. As Matushree Textiles is closed, no appeal is filed before the Supreme Court in the case of M/s. Matushree Textiles Ltd.

1.3 Deductions available from Works Contract under VAT (by Shri S.M.Kulkarni) Post VAT Scenario Levy of VAT on Indivisible Works Contracts (Deemed Sales) The states have introduced the new value Added Tax (VAT) System from 1 st April 2005. The other five States have also followed from 1st April, 2006 and the State of Tamil Nadu has introduced VAT System from 1.1.2007. At present , only Uttar Pradesh and Pondicherry (U.T.) have not joined the VAT States / UTs . They may join from 1 st April, 2007. Therefore, the VAT system is in force in most of the States and the Union Territories in India. All the VAT States have incorporated in their respective State VAT Acts, the provisions of `Works Contracts for levying the Sales Tax /VAT on the deemed sales involved in the execution of works contracts. There is no Works Contract Tax (WCT) now, it is a VAT on the Works Contract transactions (Deemed Sales). The Advantage to the Contractors is that under the VAT system, the Contractors like manufacturers can avail VAT set off / Credit of the VAT paid to the local vendors, which was not available in the Pre-VAT Regime. Please note that there is an Uniform Scheme of Taxation for levy of VAT on Works Contracts under all the State VAT Acts. There is no separate or different taxation schemes in different States like in pre-VAT period for works contracts . There is a uniformity under the works contract provisions in the Post VAT Regime. This is a positive factor for Contractors under VAT Regime. In all the State VAT provisions, there are three options available for the Contractors to levy VAT on deemed sales (Works Contracts) and VAT is leviable on the `Material Value of the Contract. The said three options (Uniform in all the VAT States) are as under, A-1 Actual Labour Deduction (Legal Option) A-2 Standard Labour Deduction (Legal Option) B - Composition Tax (Non Legal or Alternative Option) Under the legal options A-1 and A-2, the State Governments can levy VAT only on the `Material Value of the Contract and not on the `Labour Portion of the Contract. Please note that the States are empowered to levy tax on Material Value and not on Material Cost in the works contract. For example, VAT is applicable on `Cement Block Value and not on ` Cement Cost. Similarly, VAT is applicable on `Wooden Furniture Value and not on `Timber/Wood Cost in the hands of the Contractor. I have explained below, the said three options available for the Contractor, executing indivisible Works Contract under the State VAT Acts (Uniform Across the States). Except the Rates of Composition Tax, the Rates of TDS deductions, Returns and Payment dates, most of the Major Provisions are Similar / Uniform under the State VAT Acts; Actual Labour Deduction Option A-1 Option (Levy of VAT on Works Contracts in the hands of the Contractor) Under the legal option A-1, the VAT is payable on the `Material Value of the Contract. The deductions are available for arriving at the Material Value from the total contract price. Such deductions are specified in the corresponding provisions of the state VAT Acts which are based on the guidelines given by the Supreme Court in the case of Gannon Dunkerley (88 STC 204) or the Contractors can arrive at the Material value / price of the Contract by adopting cost + value Addition method. In this method, the Contractor adds to the `Material Cost which is determined by considering all the purchase bills of the materials (imports, outside the State and within the State), the margin on such material cost plus any incidental expenses attributed towards the material value. In other words, the Contractor determines the Material Price after adding Material Cost and Margin to such cost. The 4% or 12.5% VAT would be applicable on such Material Value /Price, depending upon the classification of such materials (Steel 4%, others 12.5% VAT) in which the property passes to the contractee . In this option A-1, the Contractor can avail full VAT set off / credit of the VAT paid to the local vendors (Not on CST paid to the outside the State Vendors) provided he obtains corresponding `Tax Invoices from his local vendors. Therefore, the cost of VAT is zero for the Contractors in this legal option. Similarly, the Contractee /Customer also can avail the full benefit except on the purchases covered under the Negative list under the State VAT Act on which

No VAT set off/Credit is available. Mostly the Civil Works , Construction jobs, errection of immovable property (Structures) are covered in the Negative lists. On the other works contract purchases, the full VAT set off / Credit is available to the contractee /customer. The T.D.S. (works contract) provisions are applicable to the contractee in this option which are discussed later. In nutshell, in the option A-1 (Legal), the Contractor gets full VAT set off / credit on the VAT paid on the inputs and the Contractee also gets the credit, if it is not in the Negative list (Like processing Jobs, Job works, Printing Jobs, Repair Jobs etc.) The Contractors are benefited under VAT System as the Contractors can avail full set off / credit. However, in this option the Contractor has to maintain proper books of accounts and the other records to identify the material value of the Contract. A-1 option is the Best option available since the Contractor levies VAT only on the `Actual Material Value of the contract, even though it is litigation prone option. Many Contractors who execute big indivisible works contracts, Turnkey Jobs opt for legal option A-1.

Option A-2 (Standard Labour Deduction) (Legal) (levy of VAT in the hands of the Contractor) Under the legal option A-2, the VAT is payable on the `Material Value of the Contract. The Material value is calculated after deducting the `Labour Portion from the total contract value / Price. However, in this option a table is available in the State VAT Act / Rules which shows `Standard Labour portion attributed to the various works contracts. The Contractor has to deduct such `Standard Labour portion shown in such tables from the total Contract price to arrive at the `Material value. The Contractor would charge 12.5% VAT, on such material value. Each State has provided the said `Standard Labour table , under this option. (Like in Maharashtra for Civil Works it is 30%, for Plant & Machinery 15% , for AMCs 40% and for others 25% (Residuary)). The advantage in this option compare to the A-1 option is that it is litigation free. The Sales Tax Departments would allow the said ` labour portion deductions as the same are provided in the VAT Rules itself. Also no identification record has to be maintained by the contractor for the materials used in the contracts. However, the Contractor has to consider both the options A-1 and A2 in the case where the Contractee/ Customer does not get the VAT set off / credit and then selecting the cheaper option. Like in A-1 option, in A-2 option also, the Contractor gets full credit / set off on the VAT paid on the inputs and the Contractee also gets full set off of the VAT paid provided the said purchases are not in the Negative list of VAT set off / credit. The TDS provisions are applicable to the contractee in this option also which are discussed later.

Option-B -- Composition Tax (Alternative / Non legal option) ( Levy of VAT in the hands of the Contractor ) Option B is the Composition Tax option. This is a non legal alternative option, simplier option for those Contractors who cannot maintain the proper Accounts, Record of the material and other portion in their contracts. The contractee / customer prefers this option as small amount of Composition Tax 2% / 4% is payable to the Contractor instead of 12.5% VAT payable in legal options. A-1 and A-2 . However , VAT credit/set off is not be available to them in this option ( in this option , VAT Credit is available only in the state of Maharashtra ) . Under the Composition option, the Contractor has to pay Composition Tax (VAT) on the total Contract value / price, No deduction of labour is available in this option. Similarly, No VAT set off / Credit is available on the purchases of inputs to the Contractors and the same is not available to the Contractees also. (Except under Maharashtra VAT Act/Rules, partial VAT Credit is available to both Contractor and Contractee in the

Composition Tax option). The Rates of Composition Tax differ from state to state. Generally it is 2% (for civil contracts) @ 4% for other Contracts. However, exception is in Maharashtra State where the Rate of Composition Tax is 5% on Civil Contracts and 8% on other Contracts. In Maharashtra, in this option, in excess over 4% Credit is available on the input purchases for civil contracts (where composition Tax Rate is 5%) and 64% of the total credit available for other Contracts (where Composition Tax Rate is 8%). Thus, partial VAT Credit is available to the Contractors in the Composition Tax option. However, full credit is available to the Contractee in this option in Maharashtra provided such purchases are not included in the Negative list under MVAT Rules. Therefore, except in Maharashtra, in all other states No VAT set off / credit is available to both the Contractor and the Contractee in the Composition tax option. The TDS provisions of Works Contract are applicable to Conctractee in this option which are discussed later. In Short, in all the States only the said 3 options (A-1, A-2 and B) are available in the hands of the Contractors for levy of VAT on the local works contract transactions in the VAT system. If no VAT set off/Credit is available to the Contractee / Customer, then the Composition Tax option is the Cheapest since the Rate of Composition Tax is lower than 12.5% VAT. Therefore, if the Contractee / Customer can not avail the VAT set off / Credit in all the three options , then , the VAT / Composition Tax paid to the contractor is the cost to such Contractee /Customer, hence in such cases the Contractor and Contractee should select the Best option available after considering the Actual Figures in all the three options. The States have provided separate sections / Rules under the respective State VAT Acts for the works contracts transactions which include said three options of levy of VAT, TDS, VAT Credits and Negative lists .

1.4 General Negative list Items for Works Contracts under State VAT Act & Rules (a) Purchases effected by way of works contract where the contract results into an immovable Property . (b) Purchases of Building material which are not resold but are used in the activity of Construction. (Free issues) (c) Purchases of works contracts made by the Contractee in Civil Contracts . (d) Any purchases of Consumables or of goods treated as Capital Assets by the Contractor/dealer where he is principally engaged in doing job work or labour work and is not engaged in the business of manufacturing of goods for sale by him. (Please refer to the specific provisions of works contracts under the relevant state VAT Acts for such Negative lists)

1.5 Tax deducted at source (TDS) provisions of works contracts under the State VAT Act & Rules In most of the State VAT Acts, the provisions of Tax deducted at source (TDS) are incorporated. The logic behind the TDS (WC) provisions is that the Contractors are not organized in many cases and they do not pay taxes on time , therefore in this provision the contractee / customer deducts the prescribed % of TDS from the Contract Price and pays the same before the prescribed dates, directly, to the respective State Government through the specified challan. The TDS is to be deducted by the specified customers only as notified by the State Governments. Generally, the dealers registered under the State VAT Acts, State and Central Governments, Corporations, Government Undertakings, Co-operative Societies only have to deduct the said TDS (WC) and not by all the Customers. The monetary limit of the turnover is prescribed between Contractor and Contractee for such deduction in the hands of the Customer in most of the VAT Acts. It is responsibility of the Contractee / Customer to deduct the prescribed % of TDS (As provided in the relevant VAT Act & Rules) and pay the same to the State Government before the prescribed date, otherwise interest / penalty is leviable on such Contractees / Customers. However, as per the State VAT Act provisions, the Seller (Contractor) is liable to pay VAT, if No TDS is made by the Contractee/Customer. The State Governments have prescribed different VAT Forms under the provision

of TDS (WC). In certain States, the Contractee has to obtain TANs (Tax deductible Account Number) and file Annual Returns of TDS under the TDS provisions . In Maharashtra, under MVAT Act, 4% TDS is applicable (instead of 2%) in the case where the Contractor has not obtained the VAT TIN certificate (URD Contractor).

1.6 Provisions of Works Contract for Main and Sub-Contractor under the State VAT Laws The following two types of VAT levies are provided for the transactions of works contracts between the Main contractor and the Sub-Contractor,  In certain States, (like Maharashtra) Main and Sub Contractors are treated as single legal Entity. Therefore, there is no VAT/TDS applicable between the transactions of the Main and the SubContractor. The VAT Forms are exchanged between the Main and the Sub Contractors to declare that they have discharged VAT liability for their portions of the Contracts. In such cases, the Main Contractor gets the deduction of the value of the work executed by the Sub Contractor. The main and the Sub Contractor are jointly and severally responsible for the compliance under the works contract provisions of the VAT Act .  In certain states ( other than Maharashtra), the Main and the Sub Contractors are treated as separate legal Entities, like separate two dealers under the VAT Act. Therefore, in such provisions , Sub contractor charges applicable VAT/Composition Tax to the Main Contractor, avails Credit of the VAT paid on the inputs and the Main contracts also charges VAT/Composition Tax applicable to the Contractee/Customer and avails the Credit available to him against the VAT paid to the Sub-Contractor. They are assessed / audited separately under the State VAT Act provisions. It is advisable that the Main Contractor and the Sub Contractor should discuss all the relevant VAT provisions before opting for the specific method of levy of VAT / Composition Tax to avoid complications at a later date.

1.7 VAT & Service Tax, both , Applicable on certain Works Contracts On certain Works Contracts both VAT (WC) & Service Tax are applicable on the Contract price since there involves the transfer of property in goods (sale of goods / materials) subject to VAT levied by the State Government and rendering of Taxable Service subject to Service Tax levied by the Central Government. Thus, the both the state & the Central Governments levy VAT & Service tax on the same taxable base i.e. Contract Price, respectively. The Contracts /Taxable services where both VAT and Service Tax are applicable are shown as under , y Construction contracts, Civil Jobs y Annual Maintenance Contracts (AMCs) y Errection of Plant and Machinery etc. Please note that in such Works Contracts / Taxable Services, the working for levy of VAT & Service Tax is to be done, separately, as per the provisions of VAT & Service Tax. Only in the case where the Contractor opts for A-1 legal option of actual labour deduction method, he can pay Service Tax on the actual labour portion and VAT on actual Material value. Otherwise only A-2 (Standard deduction) and B (Composition Tax) options are available under VAT and No deduction for levy of Service Tax for the Contractor. The Abatements are available under the Service Tax law for specific Taxable Services towards the value of material / goods involved in the same. Like 67% Abatement from the contract value is available under the Construction Services.

1.8 Concept & Levy of C.S.T. on Inter state Works Contracts The Central Government amended the definition of ` Sale under the Central Sales Tax Act, 1956 from 11.5.2002. With the said amendment, the states are empowered to levy C.S.T. on the interstate works contract. By the said amendment, the concept of `Interstate works contract was introduced in the C.S.T. Act by inserting in the definition of `Sale , the words Transfer of Property in goods involved in execution of works contract. When the Contractor dispatches his goods from one State to another under a individuals works contract, it is a interstate works contract. The sections 3, 4, 5 of the C.S.T. Act are applicable to such deemed sales in the interstate works contract. Accordingly, the State of dispatch can collect the Central Sales Tax on such deemed interstate sales. The Contractors may not be allowed the interstate depot transfers in the cases of indivisible works contracts since such dispatches are made to the sites of the contractee situated in other state and the same are earmarked for the specific contractee. The Contractor would invoice to the Contractee from the state of dispatch and would charge CST as applicable, with or without C/D Forms. Recently, the CST Act was further amended to explain, the deductions available on the total contract price to the Contractor to arrive at the material value. Please note that in interstate works contracts also, the C.S.T. is payable only on the Material Value/Price of the Contract and not on the Labour portion of the Contract. The examples of interstate works contract would be that of Contractor from Mumbai, dispatching goods from his Mumbai plant to the site in Chennai (Tamil Nadu) under a indivisible works contract or A Manufacture in Mumbai dispatching his own material to a processor in Surat and the processor returns back the processed material back to the Mumbai Manufacturer. The Surat processor would charge 4% CST against `C form on the material value of his invoice amount being a interstate works contract in his hands. Please note that when it is an interstate works contract, the Contractee would raise an invoice on the Customer situated in other state with applicable rate of CST on the Material value of the contract, but the Customer would not deduct any amount towards TDS since there is no provision of T.D.S. under the CST Act. TDS is to be deducted only in the local works contracts where the Contractor has charged VAT/Composition Tax. In short, if the Contractor dispatches goods from his state to the State of the Contractee (Customer) under an indivisible works contract, it is a interstate Works contract in the hands of such Contractor subject to levy of CST which is collected by the state of dispatch . However, in the interstate works contracts also, C.S.T. is payable only on the `Material Value of the Contract. How the Contractee / Customer should look into the Works Contract purchases for Minimum cost. Under the VAT System, the Contractee/Customer can avail the full VAT Credit/Set off of the VAT paid to the Contractor through the tax Invoices, provided such purchases are not in the Negative list of set off/VAT Credit. However, in the cases where the Contractees / Customers do not get any VAT set off / Credit, they should note the following points to reduce their VAT Cost, a) To decide the Best option of Levy of VAT/Composition Tax before the execution of the Works Contract Commences. b) To insist the Contractor to buy maximum inputs from local vendors only and the VAT Credit thereof should be passed on to the Contractee by reducing his sale price, accordingly. c) In case of free issues supplied by the Contractee / Customer to the Contractor , if the price of the contractor is `Net off the material value supplied by the Contarctee then there is no negative VAT impact to the Contractee . Otherwise, there is VAT cost in the hands of the contractee with regards to the VAT paid on the purchases made by the Contractee and given as free issues to the Contractor. d) Prescribed % of TDS payment to the government and timely issuance of TDS certificates to the Contractors. e) To insist the Contractor to show the VAT applicable, separately on the invoice (Tax Invoice, in the case if the Contractee can avail the credit) f) To add the clause in the agreement with the Contractor, If any additional liability on Account of VAT (WC) arises at a future date shall be borne by the Contractor. The summary of the Main Points with regard to provisions of levy of VAT/Composition Tax under the State VAT Act & Rules.

 Deemed Sales (WC) are taxed under the provisions of the State VAT Act, there are no separate Works Contract Acts.  For local works contract transaction State VAT (WC) is applicable and for interstate works contract transaction, the Central Sales Tax (C.S.T.) is applicable as covered under the CST Act.  No VAT/CST is applicable on the pure labour Jobs (No material of the Contractor / Job worker is involved)  Under the State VAT Acts, VAT is applicable on the `Material Value of the Contracts only as determined by the three options as discussed earlier and under the C.S.T.Act also CST is applicable on the `Material Value only.  In the contracts , `where both the sale of goods and rendering of Taxable service are involved, both VAT & Service Tax is payable on the same contract price subject to the relevant provisions under both the VAT & Service Tax Laws.  Proper clauses of VAT/CST should be incorporated in the Agreements between the Contractor and Contractee to avoid litigation.  Under the VAT System both the Contractor and the Contractee can avail full VAT set off/Credit subject to the Negative List.  The Contractee should ask for the price reduction from the Contractor to pass on the `VAT Benefit availed by the Contractor on his local purchases. 1.9 Composite Contracts & Theory of Accretion / Accession and Blending (By eminent expert) A composite contract is one which has constituent elements but the customer is interested in the final outcome of the contract. In such a contract, the constituent elements are so integrally connected and interdependent with each other that it is not feasible to look at the elements in isolation. Such composite contracts may also include minor elements which are incidental and ancillary to the main objective of the contract. Such elements of a composite contract are to be treated as means of attaining the ultimate object of the contract. For example, in a turnkey contract for design engineering, procurement, construction, installation and commissioning of a power plant, the individual element of engineering cannot be viewed in isolation of the procurement, construction, installation and commissioning. In a lighter vein, one can say that the icing on the cake cannot be viewed separately from the cake itself! 1.1 Works Contracts Species of Composite Contracts: Composite contracts involving both the supply of materials and rendering of services (in reasonably dominant proportions) are known as works contracts. A turnkey contract of the nature referred to above is a good example of a works contract. In a works contract, there is a transfer of materials from the contractor to the employer/contractee, however, the said transfer is not by means of sale. In a works contract, the contractor agrees to perform some work on the clients property (may be moveable or immoveable). The performance of work also involves the use of some materials of the contractor. As the contractor uses these materials to perform the work, the materials get attached to the property of the client in such a fashion that such contractors materials can no longer be removed without substantial damage either to the contractors materials or the contractees property. Since the property which is the subject matter of the work belongs to the client, the ownership of the materials so attached on the property passes on to the client albeit in an indirect fashion. 1.2 Accretion: Consider the case of a building contractor who constructs a building on the land of the client using his owned bricks, sand, cement, etc. Till the stage he applies the cement on the land and lays a brick on it, the cement and brick belongs to the contractor. But once the cement paste and the brick are applied on the land, these ingredients fasten themselves to the land. It is then not possible or viable to remove the cement or brick from the land (without fundamental damage). Since the land belongs to the contractee, the ownership in the cement and brick gets transferred to the contractee by inference and not by way of sale. This process of the contractors materials getting embedded in the clients immoveable property is referred to as the transfer of ownership in goods through the process of accretion. 1.3 Accession: Consider another example of a garage undertaking to paint the car of its client. Similar to the earlier example, till the stage the garage applies the paint on the car, the paint belong to the garage. But once the paint is applied on the car, the liquid paint gets attached on the metal of the car. It is then not possible to remove the paint without fundamental damage. Since the car belongs to the client, the ownership in the paint also gets

transferred to the client by inference. This process of the contractors materials getting embedded in the clients moveable property is referred to as the transfer of ownership in goods through the process of accession. 1.4 Blending: One more situation of works contract could be a case where multiple moveable products owned by the contractor are blended together to create a new moveable product which is non-marketable in nature. Consider the case of a printer who uses paper and ink to print cheque books for its client bank. In this case, the transaction cannot constitute a sale because cheque books are not marketable and there-fore are not goods. However, the properties in the paper and the ink have passed on to the bank the moment the printer blended these two moveable products. Thus, there is a transfer of the ownership in goods through the process of blending. 2. Nature of Indirect Taxes and applicability to Composite Contracts: At this juncture, it may be relevant to broadly classify the indirect taxes based on the nature of the taxes. At one end of the spectrum are duties on goods like customs duties and excise duties which are levied on specified activities i.e., the activity of import/export of goods or the manufacture of goods. Since the levy of duty is on an activity and not on a transaction, it is apparent that the duty is attracted irrespective of whether the product constitutes an end in itself or a means to an end. At the other end of the spectrum are taxes like sales tax (VAT) and service tax which are levied on specified transactions i.e., the transaction of sale of goods or the provision of services. Since the levy of the tax is on a transaction, one has to look at a transaction. A transaction is the cake itself (i.e., the end) and not the icing on the cake (i.e., the means to an end). This therefore suggests that for taxing the transaction, one looks at the tax implications on the cake and not on the icing ! 3. Composite Contracts Judicial Thinking: Before proceeding any further, it may be relevant to look at the judicial thought process on this aspect. In a landmark case1 pertaining to sales tax, the Supreme Court held that a building contract is one entire and indivisible contract; there is no sale of goods as a separate contract. A series of judgments of the High Courts and the Supreme Court followed this case taking the same view. In another situation, the contract provided for progressive release of payments dependent on the stage of execution of a particular component. The Supreme Court2 observed that in an indivisible, composite contract, it is not possible to vivisect the same. The Court accepted the commercial practice in spreading the contractual payments over the entire period of the execution of the contract and held that progressive release of payments would not have any bearing on the nature of the contract. In a case3 pertaining to income tax, an Indian company entered into separate contracts with the foreign company for purchase of equipment and for supervision of erection, start-up, putting into commission, etc. of the equipment. The A.P. High Court held that the terms of the separate agreements clearly showed that it was one and the same transaction. One could not be read in isolation of the other. The considerations for services in connection with the supervision of erection, start-up, putting into commission, etc. were part of the payment of the sale price of the equipment. Thus, in spite of two separate contracts, the High Court considered these as part of single sale transaction. In a landmark judgment4 pertaining to service tax, the Department tried to levy service tax on the drawing, designing and commissioning activities, for which separate amounts were indicated in the price break-up in the turnkey contract. Negating such attempt, the Tribunal held that the contract between Daelim and IOCL was a works contract on turnkey basis. It cannot be vivisected for subjecting a part of the contract price to service tax. From each of the above decisions, it is amply clear that the judiciary has consistently looked at composite contracts as a whole and has not permitted a vivisection of such composite contracts.

1.10 Back to Back Sub-contract by VASANTH D JAGANATH on 08 October 2008 Back to Back Contract Case Study Works Contract subject is a maze of complexities. The judgments given by courts contradict in such a manner that the dealer is perplexed. Case: Mr. M is a main contractor. He receives contract from Mr. C (customer). Mr. M sub-contract the entire work to Mr. S, the sub-contractor. Mr. M has a profit margin in this transaction. The question is whether Mr.M is transferring any property to Mr.C and whether there is any tax liability on him? Case Study: The case can be analysed with the background of Supreme Court and High Court decisionrendered on back to back contract under different provisions of the Law. The Honble Supreme Court in the case of State of Andhra Pradesh & Ors Vs Larsen & Tourbo Limited & Ors AIT 2008 301 - SC, held that, based on the principle of accretion, there is no multiple deemed sale. There is only one sale happening from sub-contractor to the contractee. In another case recently decided by the Honble Karnataka High Court in the case of Larsen and Toubro limited Vs Addl. Deputy Commissioner of Commercial Taxes and Another [2008] 16 VST 616 held that Contractor paying money for execution of works by sub-contractor constitutes sale. In calculating the turnover the said amount has to be taken into consideration as representing the turnover in the hands of the main contractor. The author has made an effort to find out the difference of opinion taken by the Courts. Andhra Pradesh & Ors Vs Larsen & Larsen and Toubro limited Vs Addl. Deputy Commissioner of Tourbo Limited & Ors AIT 2008 301 Commercial Taxes and Another [2008] 16 VST 616 Judgment given by Honble Supreme Judgment given by Honble High Court of Karnataka Court Principle laid down: Principle laid down: Based on the principle of accretion, there is The definition of Sale being an inclusive definition takes within its only one deemed sale from the sub- ambit, even the value of the work paid by way of cash. In calculating the contractor to the contractee. There cannot turnover the said amount has to be taken into consideration as be two deemed sale taking place from main representing the turnover in the hands of the main contractor contractor to the contractee. Provisions under the judgement relating to Provisions under the judgement relating to the State of Karnataka the State of Andhra Pradesh Issue Raised: Issue Raised: Levy of works contract to main contractor Levy of Re-sale tax on main contractor Important provisions discussed: Important provisions discussed: a) Charge to tax U/s. 4(7)(a) a) Sale U/s 2(1)(t) b) Treatment of works contracts U/r b)Total Turnover U/s 2(1)(u2) 17(1)(a) Section in Brief: Section in Brief: Charge to tax U/s. 4(7)(a): Sale U/s. 2(1)(t) with all grammatical variations and cognate Notwithstanding anything contained in the expressions means every transfer of property in goods other than b y way Act, of mortgage, hypothecation, charge or pledge by one person to another in the course of trade or commerce for cash or for deferred payment or other Every dealer executing works contracts valuable consideration, and include,shall pay tax on the value of goods at the ., time of incorporation of such goods in the a transfer of property in goods (whether as goods or in some other form) works executed at the rates applicable to involved in the execution of works contract. the goods under the Act, Treatment of works contracts, Rule 17(1)(a) In the case of contracts not covered by sub-rule (2), (3) and (4) of this Total turnover U/s. 2(u2) means the aggregate turnover in all goods of a dealer at all places of business in the State, whether or not the whole or any portion of such turnover is liable to tax, including the turnover of

rule, the VAT dealer shall pay tax on the value of the goods at the time the goods are incorporated in the works at the rates applicable to the goods.

purchase or sale in the course of inter-state trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India.

'Turnover U/s. 2(v) means the aggregate amount for which goods are bought or sold, or supplied or distributed or delivered or otherwise disposed of in any of the ways referred to in clause (t) by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration. On reading of the above provisions it is a basic question that arises as to why the courts have taken different views where there are similar transactions involved. As per the provisions under the Andhra Pradesh Value Added Tax Act, the incidence of levy of tax on transfer of property in goods is at the time of incorporation of such goods in the works executed by every dealer. This provision again has the overriding effect of all other charging section. Rule 17(1)(a) under APVAT also specifies that, in the case of works contract other than works contract specified in rule (2), (3) and (4) of rule 17 dealer shall pay tax at the time of goods are incorporated in the work. On combined reading of the above provisions it is understood that, the incidence of levy of tax arises at the time of incorporation of goods in the work. On the other hand it is the person executing the work who is liable to pay tax at the time of incorporation of goods in the work. In this case, it is the sub-contractor who executes the work. Before executing work it is sub-contractor who owns the goods. When executing the work [i.e., incorporation of goods] it is the contractee who becomes the owner of the goods. In between contractor never become the owner of the goods, therefore it is not true that, sale is taking place from main contractor without ownership rights on the goods. It has also been dealt in the above judgement that, in case of deemed sales there cannot be double deemed sale. On the other hand the Honble Karnataka High Court has taken the view that, the Turnover definition where it stars with aggregate amount for which goods are bought or sold, or supplied or distributed or delivered or otherwise disposed of in any of the ways referred to in clause (t) by a dealer, either directly or through another It means an amount received or receivable for transfer or property in goods in the execution of works contract, either directly or through another is a sale. By analyzing the above interpretations, the author is of the view that, the courts have come to the different view in respect of similar transaction because of the importance of the provisions of law as depicted under the relevant laws. Otherwise the principles with regard to transfer of property in goods, between the main contractor, sub-contractor and contractee should be one and the same. This can be observed from the following comparison of the provisions of APVAT Act, and KVAT Act. Section in Brief: Section in Brief: Charge to tax U/s. 4(7)(a): Notwithstanding anything Levy of Tax U/s. 3(1): The tax shall be levied on every sale contained in the Act, of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of this Act Every dealer executing works contracts shall pay tax on the value of goods at the time of incorporation of such goods in the works executed at the rates applicable to the goods under the Act, Treatment of works contracts, Rule 17(1)(a) In the case Liability tax and rates thereof U/s. 4(1) (c): In respect of of contracts not covered by sub-rule (2), (3) and (4) of transfer of property in goods (whether as goods or in some this rule, the VAT dealer shall pay tax on the value of the other form) involved in the execution of works contract goods at the time the goods are incorporated in the works specified in column (2) of the Sixth Schedule, Subject to at the rates applicable to the goods. .., On reading of the above provisions, the view taken by the Honble Supreme Court that, under works contract there is only one deemed sales and not more than one based on the principle of accretion is not applicable when we are applying the provisions of KVAT Act. This is because of the following reasons;

The charging section, though which is different for works contractor, but has not got separated from the main section. [i.e., both section 3 and section 4 are consistent that, tax shall be levied on dealer on every sale of goods based the nature and type of sale] b) There is no obstante or overriding provision in charging section. c) The definition of Turnover is not only restricted to transfer of property in the goods by a person executing works contract, but also applicable to person who has entrusted such -kind of work to sub-contractor. d) Under VAT, the levy of tax is multipoint. The tax is leviable on value addition. If the Honble Supreme Court view is applied, the main contractor may not be liable for value addition made for entrusting works contract to the sub-contractor. This is has been explain as under: Contractor entered into an agreement for construction of building for Rs. 100/-. In turn the Contractor entrust the job to sub-contractor for Rs. 80/-. In this case the value addition made by the main contractor is Rs. 20/-. As per Honble Supreme Court Judgement where the there is only one deemed sales, only sub-contractor is liable to tax on Rs. 80/- after deducting labour charges. There is no sale happening from main contractor to the contractee for the difference value of Rs. 20/- which represents the transfer of property in goods executed by the sub-contractor. The author is of the view that, the principle laid down by the Honble Karnataka High Court is considered to be more suitable and appropriate even under the VAT law, where the main contractor is liable to pay tax on the value addition made for entrusting the job to sub-contractor. Even though the main contractor is not executing the work directly, there is a sale taking place from main contractor to the contractee by virtue of entering into contract with the sub-contractor in pursuance of the main contract. Finally it is concluded that, the view taken by the Honble Supreme Court may lead to litigation with respect to value addition made by the main contractor for levy of tax.

a)

1.11 Judgments - K. Raheja Development Corporation vs. State of Karnataka (141 STC 298) (SC) In this judgment:-- The appellant, which carried on the business of real estate development and allied contracts, entered into development agreements with owners of lands. It got the plans sanctioned and after approval constructed residential apartments and/or commercial complexes. In most cases before construction it entered into agreements with the intending purchasers. The agreement provided that on completion of the construction the residential apartment or the commercial complex would be handed over to the purchasers, who would get an undivided interest in the land also. The appellant was entitled to terminate the agreement and dispose of the unit if a breach was committed by the purchaser. The owners of the land would transfer the ownership of the land directly to a society which was being formed under the Karnataka Ownership Flats (Regulation of Promotion of Construction, Sales, Management and Transfer) Act, 1974. The question was whether the appellant was a dealer and liable to pay turnover tax under the Karnataka Sales Tax Act, 1957, in relation to the construction contracts with the purchasers as works contracts: The Honble Supreme Court held that: (i) under section 2(1)(v-i) of the Karnataka Sales Tax Act the definition of works contract was very wide and was not restricted to a works contract as commonly understood, viz., a contract to do some work on behalf of someone else. It also included any agreement for carrying out either for cash or for deferred payment or for any other valuable consideration, the building and construction of any movable or immovable property. The definition took within its ambit any type of agreement wherein the construction of a building took place either for cash or deferred payment or valuable consideration; (ii) therefore, even if the appellant was owner to the extent that it had entered into agreement to carry out construction activity on behalf of someone else for cash, deferred payment or other valuable consideration, it would be carrying out a works contract and would become liable to pay turnover tax on the transfer of goods involved in such works contract. Further, there was no distinction under the Karnataka Sales Tax Act between construction of residential flats and construction of commercial units, and a works contract within the meaning of the term in that Act could also be for construction of commercial units. For the purpose of considering whether the agreement amounted to works contract

or not the provisions of the Karnataka Ownership Flats (Regulation of Promotion of Construction, Sales, Management and Transfer) Act, 1974, would have no relevance; (iii) the appellant was undertaking to build for the prospective purchaser on payment of price in various installments set out in the agreement. Though the appellant was not the owner it claimed a lien on the property and it had the right to terminate the agreement and to dispose of the unit if a breach was committed by the purchaser. Merely because such a clause was included in the agreement, the agreement did not cease to be a works contract within the meaning of the term in the Act. So long as there was no termination the construction was for and on behalf of the purchaser and, therefore, the agreement remained a works contract within the meaning of the term as defined in the Act. So long as the agreement was entered into before the construction was complete, it would be a works contract; and however, if the agreement was entered into after the flat or unit was already constructed, there would be no works contract.

(iv)

The law laid down by the Honble Supreme Court in K. Rahejas case (141 STC 298) was a subject matter of challenge before the Honble Supreme Court in the case of Larsen and Toubro Limited & Another vs. State of Karnataka & Another (2008-VIL-29-SC). The Honble Supreme Court while delivering the judgment on 198-2008 in the Larsen and Toubros case observed 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 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. Based on the above finding the Honble Supreme Court placed the matter before the Honourable Chief Justice of India for re-consideration of the K Rahejas case by a larger bench. Comments in the background of the judgement of the K. Rahejas case cited above: It can be noticed that the Honble Supreme Court has rendered its decision in the backdrop of an agreement to carry out the construction activity on behalf of another person. It appears that the Honble Supreme Court did not examine the issue relating to an Agreement for sale of an immovable property. It is also necessary to keep in mind the peculiar clauses in the Rahejas case. The point to be noted is that a Developer is a principal contractor on behalf of the customer or prospective buyer. Thus, if the Developer enters into a construction agreement with the prospective buyer (customer) before the construction is complete (before obtaining the occupation certificate from the appropriate authorities) it would amount to a works contract liable to tax in the hands of the Developer / Principal. However, if the developer enters into an Agreement for Sale or executes an Absolute Sale Deed after the construction is complete it can be contended that such sale is a sale of immovable property not liable to tax under the sales tax / VAT laws. Without prejudice to whatever is stated above the facts/ratio of the K. Rahejas case cannot be blindly applied in case of single agreement concept. This is because, the law laid down in the K Rahejas case completely revolved around the clause in that Agreement whereas the clauses in the Agreement for Sale with the customers may be completely different. Therefore, the judgment of the K Rahejas case cannot be applied in the case of an agreement entered into by the developer with the customer / prospective buyer for sale of an immovable property under a single agreement or agreement for sale. Now that the vexed issue arising out of the K. Rahejas is placed before the larger bench for re-consideration, in my view that on merit Agreement for sale of an immovable property could be held to be not taxable. However, the Honble larger Bench of the Supreme Court will have a final say on the issue.

Recently, the Honble Karnataka High Court had an occasion to examine a similar issue in the case of Total Environment Building Systems Pvt Ltd wherein a reassessment order was passed and taxes were levied. On a writ petition filed by the said Company before the Honble Karnataka High Court (vide Writ Petition No. 19283 19294 / 2009, dated 15-7-2009), the Honble Karnataka-High Court had passed an interim order by granting stay in respect of recovery proceedings against the re-assessment order and had directed the Commercial Tax Department to await the decision of the larger bench of the Supreme Court as noticed in Larsen & Toubro Limited vs. State of Karnataka reported in 1 7 VST 460. It now appears that this interim order passed by the Honble Karnataka High Court has been taken up for further hearing and arguments are being advanced by the Counsels of the Appellant i.e., Total Environment Building Systems Pvt Ltd. Assotech Realty Pvt Ltd vs. State of Up and Another vide Writ Petition No.1238 of 2006 (reported in 2007-TIOL-297-HC-ALL-CT) GENERAL ISSUES: 1. Single agreement concept A single Agreement for Sale reflects the true nature of the transaction between the landowner/developer and the Purchaser. It can be argued that transactions involving transfer of immovable property attracting payment of Stamp duty cannot be subjected to tax on sale of goods or services attracting VAT or Service Tax. In order to strengthen ones case, one could consider registration of the Agreement for Sale with the sub registrar. It is possible, that the department will contend the transaction to be taxable. In order to mitigate the impact of taxes it is advisable to have an all-inclusive price as far as the purchaser is concerned. The Agreement for Sale or any other documents / brochure etc., must not indicate any collections from customers towards taxes, since taxes are not being collected. In order to mitigate the hardship on account of levy of taxes, if any, by the department at any future date, it is advisable to maintain adequate bank deposits, equivalent to or higher than the tax amounts. Some developers also feel that an undertaking from the customer would suffice. Some others are also looking at escrow accounts wherein the monies collected as deposits can be deposited to take care of possible future litigations. The concept of single agreement is yet to be tried and tested. Litigation is a certainty in this situation. The Courts are yet to lay down a sustainable guideline in a single agreement scenario. The matters are also yet to be tested by the developers. Therefore, the developers may be guarded. in adopting the single agreement concept. The builders/developers may also feel that indirect taxes are passable to the customers and therefore take a stand as to why look at a scenario which has to be litigated. 2. General practice followed by developers Most of the developers are still following the two agreements concept- one for sale of undivided share of land and the other for construction. In the last few months some of the developers have started trying out the concept of single agreement theory. But I was given to understand that the prices are determined by the developers by taking into consideration the possible future litigation and also on the premise that customers may not pay the taxes at a future date in case the litigation fails, and Courts fail to accept the single agreement concept. 3. Various options and the best option available a. Single agreement concept A single Agreement for Sale reflects the true nature of the transaction between landowner/developer and the Purchaser. This, in my view is the best option. However, the law, in method is yet to settle down since we do not have a legal sanction. The risk is higher in methodology but I believe that it must be a workable proposition. Litigation is a certainty in model. b.

the this this this

Regular method of paying taxes This is a tried and tested method. It has the sanction of law and would be a cumbersome process but the impact of taxes can be minimized if properly planned at the project inception stage. It is a generally advisable method of payment of taxes. Composition method of paying taxes This is a hassle free method of paying taxes. It has the sanction of law but it is tied up with various conditions and restrictions. One needs to take a call on a case-to-case basis before opting for payment of taxes under this scheme.

c.

Conclusion: I have made an attempt in this paper to analyse the legal issues that may arise on account of the single agreement concept. I presume that this paper will throw open many new issues and controversies for discussions. The Honble delegates may raise different issues, which may need further interpretation to the issues raised by me. The conclusion reached and views expressed in this note are matters of views/opinion. The views expressed herein are the views of the author and do not necessarily reflect the views of tax administrators/Courts/Assessing Officers etc. [Source : Paper presented in two days National Tax Conference held at Jamshedpur on 29-30 August, 2009] Author: CA S. Venkataramani, Partner, Singhvi, Dev & Unni, Bangalore