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
Inference
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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