TMI Blog2012 (11) TMI 978X X X X Extracts X X X X X X X X Extracts X X X X ..... ose goods by the person to whom the transfer is made. The amendment made by the State Legislature does not transgress the limitations which have been imposed by article 366(29A)(b) of the Constitution. The amended definition of the expression "sale" in clause (b)(ii) of the Explanation to section 2(24) brings, within the ambit of that expression transactions of that nature which are referable to article 366(29A)(b). The transactions which the Legislature had in mind involve works contracts. What the State Legislatures can tax under the expanded definition contained in clause (b) of article 366(29A) must meet the governing requirements of that clause. There must be a transfer of property in goods involved in the execution of a works contract. The relevant clause in section 2(24) is valid because it does not transgress the boundaries set out in article 366(29A). Whether there is a works contract in a given case is for assessing authorities to determine. As noted earlier, it is not possible to provide a comprehensive or all-encompassing list of what contracts constitute works contracts. Section 2(24) properly construed, even after its amendment, reaches out to those cases which- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of the challenge In this batch of petitions under article 226 of the Constitution there is a challenge to the constitutional validity of section 2(24) of the Maharashtra Value Added Tax Act, 2002 as amended initially by Maharashtra Act 32 of 2006 and thereafter by Maharashtra Act 25 of 2007 on the ground that the amendments transgress the limitations contained in article 366(29A) (b) of the Constitution. The challenge of the petitioners is that by Amending the provisions of section 2(24) the State Legislature has brought within the ambit and purview of the expression "sale", an agreement for the building and construction of immovable property which is not a works contract. Consequently, the legislative competence of the State Legislature is questioned on the ground that the Legislature by and as a result of the amendment has sought to impose a tax on a transaction which does not involve a sale of goods within the meaning of entry 54 of the State List to the Seventh Schedule to the Constitution and has hence transgressed the limitations on its legislative power under article 246(3) of the Constitution. There is also a challenge in consequence to the provisions of rule 58 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rks contract" "namely, an 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." This amendment was initially made by an Ordinance, which was followed by the enactment of amending Act 32 of 2006. Subsequently by Maharashtra Act 25 of 2007 the word "namely" came to be substituted by the word "including" with effect from June 20, 2006. Rule 58(1) of the Rules framed under the Maharashtra Value Added Tax Act, 2002 provides that the value of the goods at the time of the transfer of property in goods involved in the execution of a works contract may be determined by effecting the following deductions from the value of the entire contract, in so far as the amounts relating to the deduction pertain to the said works contract:- "(a) labour and 'service' charges for the execution of the works; (b) amounts paid by way of price for sub-contract, if any, to subcontractors; (c) charges for planning, designing and architect's fees; (d) charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Sales Tax following the decision of the Supreme Court in the case of K. Raheja Development Corporation v. State of Karnataka [2005] 141 STC 298 (SC) ; [2005] 5 SCC 162. The circular adverts to the judgment of the Supreme Court and clarifies that any transfer of property after June 20, 2006 irrespective of whether an agreement was signed prior to that date would be governed by the amended definition of "sale" under section 2(24) of the Act. The circular clarifies that tripartite agreements between land owners, developers and prospective buyers would also be covered by the amendment. The trade circular also contains a clarification that an earlier determination made by the Commissioner of Sales Tax on June 28, 2004, which was prior to the amendment to section 2(24) would not govern subsisting contracts in view of the amended provisions. Finally the circular draws attention to the decision of the Supreme Court in K. Raheja [2005] 141 STC 298 (SC) ; [2005] 5 SCC 162 that 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 an agreement is entered into before the construction is complete, it would cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... materials and a contract for supply of labour and services. However, even after the enactment of the Forty-sixth Amendment, what can be brought .to tax by the State Legislatures under entry 54 of List II is a transfer of property in goods involved in the execution of a works contract. A contract for the sale of immovable property is not a works contract. A contract, which involves the sale of immovable property cannot be split by the State Legislatures; even if there is an element of a works contract. In other words the State Legislature cannot locate a sale of immovable property and-then attempt to trace out what are the goods involved in the execution of the contract; 4. The amendment to section 2(24) is beyond the Legislative competence of the State Legislature. What the State Legislature has attempted to do by the amendment and by the insertion of rule 58(1A) is to split a contract for the sale of immovable properties into three parts; (i) a contract for supply of goods and materials ; (ii) a contract for supply of labour and services; and (iii) the cost of the immovable property. A contract for the sale of immovable property does not fall within any of the sub-clauses of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of a works contract. Such a contract is not and cannot be a works contract. In a works contract property gets transferred as a result of accretion during the course of the execution of the contract and there is no transfer of immovable property simpliciter. The essence of a works contract is the transfer of property by accretion. Consequently, where a contract involves sale of immovable property, it can never be regarded as involving a works contract; 2. The Maharashtra Value Added Tax Act, 2002 ignores the concept of plurality of deemed sales. Where the developer is the owner of the land, the promoter is both the owner and developer. Alternately a developer may enter into a development agreement with the owner of the land. When a promoter appoints a sub-contractor and gets a building constructed, that contract is a works contract under article 366(29A) and a transfer of the property in the goods involved in the execution of the works contract takes place to the developer. That would be the first deemed sale. When the developer enters into an agreement with a purchaser under the MOFA thereafter, this does not Involve a sale of goods since that would amount to a second dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntain a statutory stipulation to the contrary where the accretion to the property enures to the benefit of the flat purchaser; and 3. The trade circular and the amendment to rule 58(1A) are only clarificatory in nature. The rival submissions now fall for consideration. Gannon Dunkerley The position in Indian law prior to the enactment of the Forty-sixth Amendment to the Constitution was elaborated upon in the judgment of the Supreme Court in State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd. [1958] 9 STC 353 (SC) ; AIR 1958 SC 560. By an amending Act of 1947, the State Legislature enlarged the definition of the expression "sale" in the Madras General Sales Tax Act to include a transfer of property in goods involved in the execution of a. works contract. The Supreme Court, while interpreting the provisions of entry 48 in List II of the Seventh Schedule to the Government of India Act, 1935, which dealt with taxes on the sale of goods held that since those words had in law acquired a definitive and precise meaning, it was that meaning which would have to be adopted. The expression "sale of goods" in entry 48 of List II was hence required to be construed in the sense w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the court clarified that if the parties entered into distinct and separate contracts, one for the transfer of materials for money consideration and the other for the payment of remuneration for services and for the work done, there would in such a case be really two agreements. In such a situation it was open to the State to separate the agreement for sale from the agreement to do work and render service and to impose tax on the sale of goods and materials. The Report of the Law Commission and the Forty-sixth Amendment:-The Law Commission in the course of its sixty first report dealt with the judgment of the Supreme Court in Gannon Dunkerley [1958] 9 STC 353 (SC) ; AIR 1958 SC 560 and in its recommendations suggested that there were several courses of action open to deal with the situation which had arisen following the judgment. The Law Commission was of the view that the judgment in Gannon Dunkerley [1958] 9 STC 353 (SC) ; AIR 1958 SC 560 adopted an unusually restricted interpretation of the expression "sale". Before the judgment of the Supreme Court was pronounced, "sale" was usually regarded as including works contracts which would fall within the power of the States to l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sses as a conglomerate and that it would not be possible to disintegrate the contract into a contract for sale of goods and a contract for work and labour. A submission was made on behalf of the States that consequently the State should not be subjected to the discipline of article 286 of the Constitution. The Supreme Court noted that as a result of the judgment in Gannon Dunkerley [1958] 9 STC 353 (SC) ; AIR 1958 SC 560 where a contract was entered into in two parts, viz., a part for the sale of goods and materials and another for supply of labour and services, sales tax was leviable on goods which were agreed to be sold under the first part. But no sales tax could be leviable where the contract in question was an indivisible works contract. After the Forty-sixth Amendment a works contract which was an indivisible contract is, by legal fiction, a contract which is divisible, one for sale of goods and another for supply of labour and services. Prior to the Forty-sixth Amendment the Revenue could not have contended that when the goods and materials were supplied under distinct and separate contracts, an assessment of sales tax could be made ignoring article 286. Consequently, even a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution of the works contract. The Supreme Court indicated that a deduction would have to be made from the value of the entire works contract of charges towards labour and services which would cover the following (page 235 in 88 STC):- "(a) Labour charges for execution of the works; (b) amount paid to a sub-contractor for labour and services; (c) charges for planning, designing and architect's fees; (d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract; (e) cost of consumables such as water, electricity, fuel, etc., used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract; and (f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services; (g) other similar expenses relatable to supply of labour and services; (h) profit earned by the contractor to the extent it is relatable to supply of labour and Services. The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be isolated and brought to tax. For composite contracts other than those mentioned in article 366(29A), the test would continue to be whether the parties intended separate rights arising out of the sale of goods. If there was no such intention, there is no sale even if the contract could be disintegrated. The judgment in Bharat Sanchar Nigam Ltd. [2006] 3 VST 95 (SC) ; [2006] 145 STC 91 (SC) ; [2006] 282 ITR 273 (SC); [2006] 3 SCC 1 is authority for the principle that after the enactment of the Forty-sixth Amendment, the sale element of those contracts which are governed by any of the six sub-clauses of clause (29A) of article 366 is made severable and that it is by a fiction of law isolated and subjected to sales tax by the State Governments under entry 54 of List II. The content of a works contract The foundation of the submission which has been urged on behalf of the petitioners is that in the case of a works contract a transfer of property in the goods takes place only as a result of accretion. Hence, it has been urged that where a contract involves a transfer of immovable property it is not a works contract. The submission of the petitioners, is premised on the hypothesis t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gland, 3rd Edition, Volume 34, para 3, at- page 6, in the following words:-'A contract of sale is a contract whose main object is the transfer of the property in, and the delivery of the possession of, a chattel as a chattel to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is in substance one for work and labour or one for the sale of a chattel." The primary test is whether the contract is one whose main object is transfer of property in a chattel as a chattel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale or it is carrying out of work by bestowal of labour and service and materials are used in execution of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State as are applicable to 'works contracts' represented by 'building contracts' in the context of the expanded concept of 'tax on the sale or purchase of goods' as constitutionally defined under article 366(29A), would equally apply to other species of 'works contracts' with the requisite situational modifications." In Hindustan Shipyard Ltd. v. State of Andhra Pradesh [2000] 119 STC 533 (SC) ; [2000] 6 SCC 579, the Supreme Court noted that it is difficult to lay down an inflexible rule to distinguish between a contract for sale and a contract for labour. The tests which the Supreme Court laid down, inter alia, were as follows (pages 545 and 546 in 119 STC):- ". . . (2) Transfer of properly of goods for a price is the linchpin of the definition of 'sale'. Whether a particular contract is one of sale of goods or for work and labour depends upon the main object of the parties found out from an overview of the terms of the contract, the circumstances of the transactions and the custom of the trade. It is the substance of the contract document/s and not merely the form, which has to be looked into. The court may form an opinion that the contract is one whose main object i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sale of land with a house in the course of erection upon it." The extract from Hudson is indicative of the fact that in a typical case work will be carried out upon the land of the employer or building owner though in some special cases an obligation to build may arise by contract where this is not so. The author cites the illustration of building leases and contracts for the sale of land with a house in the course of erection upon it. The elaboration of the concept in Hudson is indeed on the same lines as the judgment of the Supreme Court in Builders Association [1989] 73 STC 370 (SC) ; [1989] 2 SCC 645 which notes the variations implicit in the notion of works contracts. Therefore, as a matter of first principle, it cannot be postulated that a contract would cease to be a works contract if any more than only two elements are involved in its execution, viz., (i) a supply of goods and materials; and (ii) performance of labour and services. In the modern context and having regard to the complexity of work, it would be simplistic to reduce the, connotation of works contracts to contracts only involving the aforesaid two elements. When the, Forty-sixth Amendment was enacted, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as much a product of as it is a cause for the complexity of regulatory, mechanisms. Traditional forms of contract undergo a change as business seeks to meet new requirements and expectations, from service providers in an increasingly competitive market environment. Increasing competition, following the opening up of the Indian economy to increased private investment has had consequences for the land market and the business of building and construction. The nature and complexity of building contracts has changed over time. The obligations which business promoters assume under works contracts may vary from situation to situation and contractual clauses are drafted to meet the demands of the trade, the needs of consumers of services and the requirements of regulatory compliance. So long as a contract provides obligations of a contract for works, and meets the basic description of a works contract, it must be described as such. The assumption of additional obligations under the contract, will not, detract from the situation or the legal consequences of the obligations assumed. MOFA Now it would be necessary to consider the provisions of the Maharashtra Ownership of Flats (Regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement in the prescribed form. The agreement is required to contain the particulars specified in clause (a) of sub-section (1A). The liability of the promoter to construct a building according to the plans and specifications approved by the local authority; the date by which possession of the flat would be handed over; the extent of the carpet area of the flat; the price of the flat including the proportionate price of the common areas and facilities and the nature, extent and description thereof have to be incorporated. The model form of agreement is prescribed in form V to the Act. Under the statutory form it is, inter alia, prescribed, that the payment of the price shall be made by the purchaser to the promoter in a phasewise manner according to the progress of the construction. Under clause 18(h), the flat purchaser is required to bear and pay for the increase in local taxes, water charges and other levies. Under clause 20 it has been stipulated that the agreement would not be construed as a grant, demise or assignment in law of the said flats or plot and building and the flat purchaser shall have no claim save and except in respect of the flat agreed to be sold to him. The open ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uent decision of this court in Maria Philomina Pereira v. Rodrigues Construction AIR 1991 Bom 27:- ". . . under the Ownership Flats Act, if the promoter does not comply with these obligations, there are other serious consequences to follow, including a prosecution. Ordinarily such considerations would not arise when a simple contract entered into between two individuals is broken. Therefore, it must necessarily be held that whenever a builder enters into an agreement with any flat purchaser, containing provisions which are to be incorporated as provided under the said Act, all such agreements must necessarily be held to be special agreements which can be enforced by filing suits where the valuation would be a notional valuation under section 6(iv)(j) of the Bombay Court-fees Act, 1959." In the judgment in Jayantilal Investments v. Madhuvihar Co-op. Housing Society [2007] 9 SCC 220, the Supreme Court has noted that the State Legislature has sought to regulate the activities of promoters in sections 3 and 4. An agreement between the promoter and flat purchaser is mandatorily required to comply with the prescribed form V. The Supreme Court held that clauses 3 and 4 of the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o accept that the agreement was a mere agreement to sell and that it did not create any right, title and interest in favour of the flat purchaser. The document, the Division Bench held, would be liable to the payment of stamp duty under article 25 on the ground that it is a conveyance and whether or not possession was given on that date was not a relevant and decisive factor. The view taken by the Division Bench was affirmed by the Supreme Court in appeal in Veena Hasmukh Jain v. State of Maharashtra [1999] 5 SCC 725. In enacting the provisions of the MOFA, the State Legislature was constrained to intervene, in order to protect purchasers from the abuses and malpractices which had arisen in the course of the promotion of and in the contraction, sate, management and transfer of flats on ownership basis. The State Legislature has imposed norms of disclosure upon promoters. The Act imposes statutory obligations. The manner in which payments are to be made is structured by the Legislature. As a result of the statutory provisions, an agreement which is governed by the MOFA is not an agreement simpliciter involving an ordinary contract under which a flat purchaser has agreed to take a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of work in accordance with the plans and specifications disclosed, the creation of charges in or, upon the flat agreed to be sold and the land, and the eventual transfer of title to a co-operative society is governed by statutory obligations. The foundation of the submission of the petitioners is based on the provisions of the MOFA. Those provisions have been analysed earlier. But it is necessary to note here that the MOFA is not the only regulatory enactment governing the promotion, sale and transfer of flats in the State. The Maharashtra Apartment Ownership Act, 1970 was enacted to provide for the "ownership of an individual ownership apartment in a building, and to make such apartment heritable and transferable property". Section 2 provides that the Act applies only to property, the sole owner or all of the owners of which submit it to the provisions of the Act by executing and registering a declaration as provided in the Act. Section 4 stipulates that every apartment together with its undivided interest in the common areas and facilities appurtenant to the apartment shall for all purposes constitute heritable and transferable immovable property within the meaning of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not contingent upon any other statutory regulation of apartments under cognate legislation in the State of Maharashtra. We have, however, considered the effect of the provisions of the MOFA since they were pressed in aid on behalf of the petitioners. The constitutionality of the MVAT Act, 2002 must be determined by interpreting the statutory provisions of that Act as they stand. Having considered the issue of constitutional validity, the petitioners have been unable to displace the presumption of constitutionality that must ordinarily apply to all legislations. We find ourselves unable to accept the submission which has been urged on behalf of the petitioners that the Legislature, in the provisions of section 2(24) as amended, has transgressed the limitations on its legislative power by bringing what were not in their substance works contracts within the field of the amended definition. The submission which has been urged on behalf of the petitioners proceeds on the foundation that a works contract is a contract for the purpose of work which involves only two elements, viz., a supply of goods and material and a, supply of labour and services. Works contracts have numerous var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions which the Legislature had in mind involve works contracts. What the State Legislatures can tax under the expanded definition contained in clause (b) of article 366(29A) must meet the governing requirements of that clause. There must be a transfer of property in goods involved in the execution of a works contract. The relevant clause in section 2(24) is valid because it does not transgress the boundaries set out in article 366(29A). Indeed, after the 46th Amendment, State legislation must confine itself to the limits set out even in the expanded concept of what constitutes a sale or purchase of goods in article 366(29A). State legislation cannot expand the ambit of what constitutes a tax on the sale or purchase of goods beyond the constitutional frontiers. In order that section 2(24) remains within constitutional boundaries, in the context of works contracts, it must be read to cover those cases which fall within the expanded definition as elaborated after the 46th Amendment. Whether there is a works contract in a given case is for assessing authorities to determine. As noted earlier, it is not possible to provide a comprehensive or all-encompassing list of what contracts cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The measure of the tax, as held by the Supreme Court in its decision in Union of India v. Bombay Tyre International Ltd, [1986] 59 Comp Case 460 (SC) ; [1984] 1 SCC 467, must be distinguished from the charge of tax and the incidence of tax. The Legislature was acting within the field of its legislative powers in devising a measure for the tax by exuding the cost of the land. In so far as the trade circular dated February 7, 2007 is concerned, the Commissioner of Sales Tax has only adverted to the decision of the Supreme Court in K. Raheja Development Corporation [2005] 141 STC 298 (SC) ; [2005] 5 SCC 162. The circular, however, clarifies by way of abundant caution, that it cannot be used for legal interpretation and was only intended as a clarificatory guide. A trade circular is only meant for the guidance of the trade. A circular cannot override a legislative provision or an exercise in the nature of subordinate legislation. The constitutional validity of a legislative provision or of subordinate legislation cannot be determined by a circular. In its, decision in the case of K. Raheja Development Corporation v. State of Karnataka [2005] 141 STC 298 (SC) ; [2005] 5 SCC 162, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge to the notification dated July 9, 2010, it may be noted that the notification which has been issued in exercise of power conferred by section 42(3A) provides for a composition scheme. A composition scheme is made available at the option of the registered dealer. There is no compulsion or obligation upon a registered dealer to settle. The court may in an extreme instance interfere in the exercise of its powers of judicial review only where the terms of a composition scheme are ex facie arbitrary and extraneous so as to be violative of article 14. That has not been established before the court in this case. There is no merit in the challenge to the Constitutional validity of the composition scheme. Finally we may also deal with the submission as regards the plurality of deemed sales. The submission as regards plurality of deemed sales is based on the decision of the Supreme Court in State of Andhra Pradesh v. Larsen and Tourbo Ltd. [2008] 17 VST 1 (SC) ; [2008] 9 SCC 191. In that case, the issue before the Supreme Court was whether a turnover of Rs. 111.53 crores of the sub-contractors was liable to be added to the turnover of L. and T. The Supreme Court noted that once the wor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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