Friday, 21 March 2014


Works Contract is most questioned and frequently litigated issue in the Court of Law, and also between the purchaser of the flat and promoter.The decision of the Hon’ble Supreme Court in Gannon Dunkerleys case stating that the expression “Sale of goods as used in Seventh Schedule of Constitution has the same meaning as in Sale of Goods Act made the law commission in its sixty first report to recommend to amend the Constitution of India - Accordingly 46th amendment was passed in 1982.This empowered the states to legislate laws to levy tax on transfer of property.The goods involved in execution of works contract may be in the form of goods or in any other form. Article 269 of the Constitution provides for levy of tax on sale or purchase of goods other than news paper. In case of interstate trade and commerce, the tax is to be levied by Government of India, but assigned to the states in which tax is leviable.

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

Work contract
One has to distinguish the difference between contract of sale of goods and contract of work.The difference is very thin. It is terms of the contract and nature of the obligation to be discharged, which distinguishes works contract from contract for sale.

In case of sale of goods, goods are delivered as they are to the purchaser, whereas in case of works contract, the goods are delivered in a modified form. This may be well explained in the purchase of readymade house, which is sale of goods and contract to construct a house, which is a works contract. In purchase of readymade house, the house is delivered as it is, whereas in case of contract for construction, the house is constructed using various materials and delivered to the purchaser.This is well explained in case HAL Vs State of Karnataka (1984) 55 STC 314.

In another case HAL Vs State of Orissa,Hon’ble Supreme Court has observed that in contract of works there is a person performing or rendering service on property, where as in case of sale of property there is individual existence of the property as a whole, which is being delivered to the purchaser.

Types of Contracts
There is no well established formula by which contract for sale and contract of work can be distinguished.Any contract which contains not only the work but also requires goods to be used may be of the following three types;

q  Contract may be for works to be done for remuneration and also for supply of goods in execution of work.This is a composite contract.

q  It may be contract of working which use of materials is incidental to the execution of the work. This is contract for work and labour not involving sale of goods.

q  It may be contract for supply of goods where some work is required as incidental to sale.  This is purely a contract of work.

Agreements, where in land and buildings are conveyed to the prospective purchaser and proper stamp duty is paid on such conveyance are transfer of immovable property and are not liable to tax under sale tax laws.

Agreement with Builder
However we shall examine cases, where developer executes General Power of Attorney in favour of builders for valuable consideration such contracts may be any of the following types;

q  Power of attorney for valuable consideration.
q For valuable consideration in part and partly by way of constructed property.

Hon’ble Supreme Court in Raheja Development Corporation Vs State of Karnataka (Appeal [Civil]) 2766 of 2000 5/5/2000 observed that “the definition of works  contract under Karnataka Sales tax is very wide and not restricted to works contract, it also includes “any agreement for carrying out either for cash or for deferred payment or for any valuable consideration, the building and construction of any movable or immovable property.

Land being immovable property is not liable for payment of sales tax.But when any construction takes on land through an independent contractor on behalf of the builder, contractor executing the work is liable to pay works contract tax.

Dual Role of Developer
We may also visualise a situation where a builder himself acts as contractor.In such situation the sales tax department considers the builder in dual capacity as contractor and as owner/builder.The department is subjecting the builder to sales tax.The relevant case is Mittal investments corporation Vs. State of Karnataka which was decided by Hon’ble high Court of Karnataka.  It was held as follows;

q  If the building was first constructed and thereafter agreed to be sold, then it was a sale of immovable property for which no sales tax is attracted.

q  According to the agreement, some advance has been taken at the time of executing agreement and the balance amount to be paid in 15 instalments

q  It has not been established that at the time of agreement, whether construction has started by the builder.

q  The purchaser has to purchase the land from the purchaser and not from the builder.

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

It was held that there is transfer of property in goods and liable for tax.On review petition it was held, the builder would not be liable to pay sales tax under section 5B in respect of buildings which have been completed before entering into an agreement and also in respect of agreements which have been entered after the construction of the building was started.However, this was overruled by Hon’ble Supreme Court in case of K. Raheja Development Corporation Vs. State of Karnataka

The question whether a particular contract is for sale of goods or contract for work or labour is very difficult to determine.The distinctions and terms specified by various courts are not exhaustive.They mainly dwell on one or two points which have come in the cases, which are rigid and can be made applicable to all cases. The deciding factor would be the contents of contract, the circumstances of the transaction of the prevailing custom of the trade.The levy of the works contract tax is on the materials used in execution of particular contract, the property which is ultimately transferred.

Karnataka Sales Tax Act
The provisions relating to works contract under Karnataka Sales Tax Act were inserted with effect from 01.08.1985 but were given effect from 1986.Section 2(29)(b) of KVAT Act deal with the Works Contract, which refers to the property in goods involved in execution of works contract for cash or deferred payment. Section 2(37) defines“Works Contract” as works contract includes any agreement for carrying out for cash,deferred payment or other valuable consideration, the building,construction, manufacture, processing, fabrication, erection, installation, fitting out,improvement modification, repair, or commissioning of any movable or immovable property.

The contractor has to include the sales tax in the quotation itself, so that he can collect it from the principle and pay same to the Department, if not he has to pay the sales tax on his own profit.The developer has to include this clause in the agreement to sell and collect the tax from the purchaser of flat and remit the same to the Commercial Tax Department.

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