- (1.) We have heard Shri Ashok Kumar and Shri Praveen Kumar for the petitioner. Shri C.B. Tripathi, Special Standing Counsel appears for the State respondents. In this writ petition filed by the petitioner carrying on business as builder/developer constructing 240 flats, provisional assessment order dated September 21, 2013 passed by the Deputy Commissioner, Commercial Tax, Sector-3, NOIDA for June 2013 under the U.P. Value Added Tax Act, 2008, for levying commercial tax on the sale of goods under the works contracts/agreements in constructions as defined in clause (m) of section 2 read with section 3F of the Act, has been challenged on the ground that in such building contracts/agreements no sale of goods is involved, and that what is sold or transferred is the constructed flats/houses/apartments as chattels.
(2.) Earlier similar writ petitions were entertained on the ground that in Larsen & Toubro Limited v. State of Karnataka, 2008 17 VST 460SLP (C) No. 17741 of 2007 a two-Judge Bench of the honorable Supreme Court had disagreed with the opinion expressed in K. Raheja Development Corporation v. State of Karnataka, 2005 141 STC 298in which imposition of sales tax on sale of goods in such contracts/agreements and the constitutional validity of the provisions levying sales tax entered into before construction is complete was upheld and referred the matter for consideration of a larger Bench.
(3.) The larger Bench of the honourable Supreme Court heard and decided the reference on September 26, 2013 Larsen & Toubro Limited v. State of Karnataka, 2013 65 VST 1and has held that the opinion expressed in K. Raheja Development Corporation v. State of Karnataka,200] 141 STC 298is the correct law. It was held by the larger Bench of the honourable Supreme Court in paras 101, 107, 114, 115, 116 and 118 as follows (pages 45 to 48, 50 and 51 in 65 VST): "101. In light of the above discussion, we may summarise the legal position, as follows: (i) For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, three conditions must be fulfilled: (one) there must be a works contract, (two) the goods should have been involved in the execution of a works contract, and (three) the property in those goods must be transferred to a third party either as goods or in some other form. (ii) For the purposes of article 366(29A)(b), in a building contract or any contract to do construction, if the developer has received or is entitled to receive valuable consideration, the above three things are fully met. It is so because in the performance of a contract for construction of building, the goods (chattels) like cement, concrete, steel, bricks, etc., are intended to be incorporated in the structure and even though they lost their identity as goods but this factor does not prevent them from being goods. (iii) Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. The term 'works contract' in article 366(29A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services alone. Nothing in article 366(29A)(b) limits the term 'works contract'. (iv) Building contracts are species of the works contract. (v) A contract may involve both a contract of work and labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and contract for work (or service) is virtually diminished. (vi) The dominant nature test has no application and the traditional decisions which have held that the substance of the contract must be seen to have lost their significance where transactions are of the nature contemplated in article 366(29A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contract. The enforceability test is also not determinative. (vii) A transfer of property in goods under clause (29A)(b) of article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made. (viii) Even in a single and indivisible works contract, by virtue of the legal fiction introduced by article 366(29A)(b), there is a deemed sale of goods which are involved in the execution of the works contract. Such a deemed sale has all the incidents of the sale of goods involved in the execution of a works contract where the contract is divisible into one for the sale of goods and the other for supply of labour and services. In other words, the single and indivisible contract, now by the Forty-sixth Amendment has been brought on par with a contract containing two separate agreements and States have now power to levy sales tax on the value of the material in the execution of works contract. (ix) The expression 'tax on the sale or purchase of goods' in entry 54 in List II of the Seventh Schedule when read with the definition clause (29A) of article 366 includes a tax on the transfer of property in goods whether as goods or in the form other than goods involved in the execution of works contract. (x) Article 366(29A)(b) serves to bring transactions where essential ingredients of 'sale' defined in the Sale of Goods Act, 1930 are absent within the ambit of sale or purchase for the purposes of levy of sales tax. In other words, transfer of movable property in a works contract is deemed to be sale even though it may not be sale within the meaning of the Sale of Goods Act. (xi) Taxing the sale of goods element in a works contract under article 366(29A)(b) read with entry 54, List II, is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of immovable property. The value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat purchaser after incorporation of goods. . . . 107. On consideration of the arguments that were put forth by the parties, the court in K. Raheja Development : [2005] 141 STC 298 (SC) : [2005] 5 RC 105 : [2005] 5 SCC 162 held as under: (i) The definition of the term 'works contract' in the Act is an inclusive definition. (ii) It is a wide definition which includes 'any agreement' for carrying out building or construction activity for cash, deferred payment or other valuable consideration. (iii) The definition of works contract does not make a distinction based on who carries on the construction activity. Even an owner of the property may be said to be carrying on a works contract if he enters into an agreement to construct for cash, deferred payment or other valuable consideration. (iv) The developers had undertaken to build for the prospective purchaser. (v) Such construction/development was to be on payment of a price in various installments set out in the agreement. (vi) The developers were not the owners. They claimed lien on the property. They had right to terminate the agreement and dispose of the unit if a breach was committed by the purchaser. A clause like this does not mean that the agreement ceases to be 'works contract'. So long as there is no termination, the construction is for and on behalf of the purchaser and it remains a 'works contract'. (vii) If there is a termination and a particular unit is not resold but retained by the developer, there would be no works contract to that extent. (viii) If the agreement is entered into after the flat or unit is already constructed then there would be no works contract. But, so long as the agreement is entered into before the construction is complete it would be works contract. . . . 114. In article 366(29A)(b), the term 'works contract' covers all genre of works contract and it is not limited to one specie of the contract. In K. Raheja Development : [2005] 141 STC 298 (SC) : [2005] 5 RC 105 : [2005] 5 SCC 162, the definition of 'works contract' in KST Act was under consideration. That definition of 'works contract' is inclusive and refers to building contracts and diverse construction activities for monetary Consideration, viz, for cash, deferred payment or other valuable consideration as works contract. Having regard to the factual position, inter alia, K. Raheja Development : [2005] 141 STC 298 (SC) : [2005] 5 RC 105 : [2005] 5 SCC 162, entered into development agreements with the owners of the land and it also entered into agreements for sale with the flat purchasers, the consideration being payment in installments and also the clauses of the agreement the court held that developer had undertaken to build for the flat purchaser and so long as there was no termination of the contract, the construction is for and on behalf of the purchaser and it remains a 'works contract'. The legal position summarized by us and the foregoing discussion would justify the view taken by the two-Judge Bench in K. Raheja Development : [2005] 141 STC 298 (SC) : [2005] 5 RC 105 : [2005] 5 SCC 162. 115. It may, however, be clarified that activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government. 116. The reasons stated in the referral order for reconsideration of K. Raheja Development : [2005] 141 STC 298 (SC) : [2005] 5 RC 105 : [2005] 5 SCC 162 do not make out any good ground for taking a view different from what has been taken by this court in K. Raheja Development : [2005] 141 STC 298 (SC) : [2005] 5 RC 105 : [2005] 5 SCC 162. We are in agreement with the submission of Mr. K.N. Bhat that since K. Raheja Development : [2005] 141 STC 298 (SC) : [2005] 5 RC 105 : [2005] 5 SCC 162 in May, 2005 almost all States have modified their laws in line with K. Raheja Development : [2005] 141 STC 298 (SC) : [2005] 5 RC 105 : [2005] 5 SCC 162 and there is no justification for change in the position settled after the decision of this court in K. Raheja Development : [2005] 141 STC 298 (SC) : [2005] 5 RC 105 : [2005] 5 SCC 162. . . . 118. We are clearly of the view that K. Raheja Development : [2005] 141 STC 298 (SC) : [2005] 5 RC 105 : [2005] 5 SCC 162 lays down the correct legal position and we approve the same.";