“Supreme Court of India”
Article 366, (29-A) of the Constitution of India specially with reference to the definition sale of “goods includes transfer of property of goods involved in the execution of works contract alone is taxable.
In the decision of K. Raheja of the Apex Court dated 5-5-2005 which arose out of the order of Hon’ble Karnataka High Court question was as to “the Contractor has constructed the building for himself or it was constructed for the prospective buyers with whom the agreements have been entered into even before the construction” is liable to tax as works contract.
Implication of Raheja’s Declaration :
Even though in paragraph 12 of the judgment some observations have been made when it was observed by Hon’ble Supreme Court of India that the definition of the works contract is very wide and it is not restricted to a works contract commonly understood and even if the owner of the property enters into an agreement to construct flats and building on behalf of anybody else it shall be treated as works contract and the owner shall be liable to pay the tax.
But these observations have to be read with reference to the contract entered into between prospective purchasers of the flats and the developer. In this connection paragraph 19 of the said judgment is very important in which it has been mentioned as follows
“To consider whether the appellants are executing works contract one needs to look at a typical agreement entered into with the purchaser and relevant clauses 1, 5(c) and 7.”
which has been quoted by the Hon’ble Supreme Court of India.
Judgment of K. Raheia not applicable in certain cases:
According to me the judgment of K. Raheja (supra) will not be applicable where the construction has not been done for an on behalf of prospective purchasers.
The judgment shall also not be applicable in those cases where flats has not been sold and has only been given on lease.
If the company gives the built up area on lease and charge the lease rent in addition to the premium fixed for giving the said premises on lease, the said agreement shall continue to be lease agreement which will not amount to sale.
Where the construction has been made exclusively by the owner himself for himself and not for any prospective purchaser or where the construction has been completed and thereafter the agreement is made for the sale of such constructed building or flat; the judgment of K. Raheja (supra) cannot be a basis for imposition of tax on transfer of property involved in the construction of building.
It is also important that where there is a contract of sale of any completed flat or building, the judgment of
K. Raheja (supra) does not come into the picture at all.
K. Raheja (supra) does not come into the picture at all.
Raheja referred for reconsideration to ger Bench:
The Division Bench of the Supreme Court consisting of Hon’ble Mr. Justice S.H. Kapadia and Hon’ble Mr. Justice B. Sundershan Reddy passed an order on 19th August, 2008 in the case of M/s. Larsen & Tourbo Ltd., to place the matter before the Larger Bench for its reconsideration of K Raheja’s judgment.
The Supreme Court in that regard referred to the relevant provisions of the Karnataka Sales Tax Act, the definitions of the term ‘sale’ and ‘works contract’ under the said Ac, and Para 20 of the judgment in the case of M/s. Raheja Development Corporation and observed that they were unable to accept the proposition laid down in the said para of K. Raheja’s judgment.
Value of goods also taxable under Works Contract:
Even in respect of transfer of property involved in the execution of works contract, the tax under Article 366 (29-A) can only be levied on the value of the goods involved in the works contract.
Hon’ble Supreme Court in the case of Gannon Dunkerley vs. State of Rajasthan reported in 1993 (88)STC 204 has held that while arriving at the value of the goods involved in the execution of works contract the various components have to be excluded namely :-
(i) Labour charges for execution of works contract;
(ii) Amounts paid to sub-contractorsfor labour and service;
(iii) Charges for planning, designing and architect fee;
(iv) Charges for obtaining the machinery and tools on hire used in the execution of works contract;
(v) Cost of consumables such as water, electricity, fuel etc;
(vi) Transportation charges for transport of goods to the place of works;
(vii) Over-head expenses of the head office, branch office, including rent, salary, electricity, telephone charges etc and interest charges to bank and financial institutions
(viii) Profit expected on such contract.
According to the decision of the Apex Court, the value of the goods involved in the execution of works contract will have to be determined by taking into account the value of the entire works contract and deducting there from the charges towards labour and service which are enumerated therein.
What was sought to be excluded from the purview of tax on the transfer of property involved in the execution of works contract has been brought under the service tax not w.e.f. 1.6.2007.