2025 (5) TMI 1222 - HC - VAT / Sales Tax

Taxable Turnover - Works contract - Construction of Road - Build-Operate-Transfer scheme - no actual sale or no transfer of property or goods during the relevant assessment years and that there was no taxable turnover or business activity until the commencement of toll collection which only started from 07.06.2001 - HELD THAT - There is no such transfer of ownership or deemed ownership in favour of the contractor during the construction of the road and during the concessional period under the BOT scheme. The Government always remains the owner of the land both in works contracts or in BOT and only possession is given to the contractor to construct the road and recover the cost of construction from the public or passengers by way of toll. As held by the Division Bench of this Court in the case of Ashoka Infraways Private Limited 2024 (10) TMI 559 - MADHYA PRADESH HIGH COURT apart from the Government no one has the authority to collect the toll or service charges from any person. If that authority has been given to the contractor in the BOT scheme instead of making direct payment for the construction of the road there would be no escape from the tax liability on the contractor. As per the BOT scheme the payment to the petitioner for the work done was deferred by way of toll after completion of the concessional period which doesn t mean that there was no sale during the Assessment Year 2000 01. As per the scheme of the commercial tax and entry tax the tax is liable to be paid every year. Only the mode of payment was deferred which has not been explained in the definition of sale in Section 2 (t) (i) 2 (t) (ii) of the Act of 1994. Section 2 (t) (vi) also clarifies that sale with its grammatical variations and cognate expressions means that a transfer of right to use any goods for any purpose (for a certain period) for cash deferred payment or other valuable consideration will also be treated as a sale. In the case of Bharat Aluminium v/s The Commissioner of Sales Tax 1996 (4) TMI 451 - MADHYA PRADESH HIGH COURT this Court held that for exchange of one item for another item is a sale. As per Rule 33 of the M.P. Commercial Tax Rules 1995 (in short the Rules of 1995 ) also the dealer shall specify in the return its turnover the details of the sale/purchase for other than money consideration. The Assessing Officer shall fix the value of consideration in money for the purpose of determining the taxable turnover. Admittedly the petitioner is a dealer then certainly liable to pay taxes by filing a return on the goods purchased and brought into the State in execution of the works contract. The words project and project cost are defined in Clauses W3 and W4 of the agreement. According to the project it shall mean survey investigation studies design construction reconstruction improvement strengthening and repair. All the work related to the maintenance of the road renewal of surface bridge tunnel culvert etc. and the cost offered to invest by the entrepreneur for completion of the aforesaid project shall be a project cost - the period of collection of the toll upon construction of the Dewas By-pass road was fixed for a fixed concession period i.e. 3941 days for the Katni project and 3351 days for the Mhow Ghatabillod project by taking into consideration all the costs and expenses incurred in the construction work. The petitioner was required to make all arrangements for the money for construction of the bypass road the petitioner was given the right to collect the toll after completion of the construction of the road for which period as above was fixed after considering the total cost of construction of the project and its recovery by way of collection of tolls. After the expiry of the said period the petitioner shall not have any claim on the road as well as on a toll. Conclusion - The petitioner is misconstruing the terms of the agreement and the construction of Dewas bypass road on BOT basis that it does not amount to execution of works contract the petitioner executed the works contract on the land belonging to the State Government and recovered the construction and maintenance cost by way of toll with due permission from the State Government it is nothing but a deferred payment by a mode of recovery of toll. The land on which roads were constructed by the petitioner remained in the ownership of the State. Hence there are no substance in these writ petitions. Petition dismissed.

Summary

The core legal questions considered by the Court in these petitions under Article 226 of the Constitution of India primarily revolved around the taxability of transactions under the Madhya Pradesh Commercial Tax Act, 1994 and the Madhya Pradesh Entry Tax Act, 1976, in the context of infrastructure projects executed under the Build-Operate-Transfer (BOT) model. The key issues were:

1. Whether the BOT contracts executed by the petitioner constituted "works contracts" liable to commercial tax and entry tax under the relevant statutes, despite the absence of actual sale or transfer of property in goods during the assessment years.

2. Whether the purchase and use of construction materials by the petitioner during the construction phase, prior to commencement of toll collection, attracted commercial tax and entry tax liabilities.

3. Whether the deferred consideration mechanism inherent in the BOT scheme, whereby the petitioner recovers investment through toll collection rather than direct payment from the State, constituted a taxable sale or transfer of property in goods.

4. The applicability of the statutory definitions of "sale," "turnover," and "business" under the Commercial Tax Act and Entry Tax Act to the facts of BOT contracts.

5. The validity of the assessment methodology adopted by the Commercial Tax Department, including estimation of turnover and imposition of penalties.

6. The effect of contractual indemnity clauses regarding tax liabilities on the petitioner's liability to pay commercial and entry taxes.

Issue-wise Detailed Analysis

Issue 1: Taxability of BOT Contracts as Works Contracts

The legal framework involved the Madhya Pradesh Commercial Tax Act, 1994, particularly the definition of "works contract" and "sale" under Sections 2(t) and related provisions, and the Entry Tax Act, 1976. The State argued that BOT contracts fall squarely within the definition of works contracts, involving transfer of property in goods for valuable consideration, thus attracting commercial and entry taxes. The petitioner contended that BOT contracts differ from conventional works contracts in that no sale or transfer of goods occurs during the construction phase, and the only consideration is the right to collect tolls, which is not payment by the State.

The Court examined the contractual terms, noting that the petitioner was responsible for construction and maintenance of roads using its own funds and was granted the right to collect tolls for a fixed concession period to recover investment. The land remained owned by the State, and possession was given to the petitioner for construction and toll collection purposes only.

Relying on the definition of "sale" under Section 2(t) of the Commercial Tax Act, which includes transfer of property in goods for cash, deferred payment, or other valuable consideration, the Court concluded that the right to collect tolls constituted deferred consideration. The Court emphasized that the BOT scheme did not alter the taxable character of the transaction; rather, it represented a deferred payment mechanism. The transfer of property in goods involved in the execution of the works contract was thus taxable.

The Court referenced the Full Bench decision in Viva Highways v. Madhya Pradesh Road Development Authority, which held that any agreement falling within the definition of works contract must be treated as such for tax purposes, regardless of nomenclature.

Issue 2: Tax Liability on Purchase and Use of Construction Materials During Pre-Completion Period

The petitioner argued that since construction was incomplete as on 31.03.2001 and toll collection commenced only after issuance of the completion certificate on 07.06.2001, no business or taxable turnover existed during the assessment year 2000-01. The petitioner's balance sheets classified goods as "capital work in progress," indicating no sale or commercial activity. The petitioner contended that entry tax liability arises only when goods are brought into the local area in the course of business, which had not commenced.

The State countered that the petitioner was a registered dealer who had brought goods into the local area for use in the BOT projects, which amounted to entry of goods in the course of business under Section 3 of the Entry Tax Act. The commencement of toll collection was not determinative of business commencement for tax purposes.

The Court held that the petitioner, being a dealer, was liable to pay commercial and entry taxes on goods purchased and used in the execution of the works contract, even if payment was deferred. The Court observed that the Assessing Authority was empowered under Rule 33 of the Commercial Tax Rules to fix the value of consideration in money for turnover assessment, including cases of deferred payment. The Court rejected the argument that absence of actual sale or turnover in the books absolved the petitioner of tax liability.

Issue 3: Validity of Assessment Methodology and Penalties

The petitioner challenged the assessment methodology whereby the Assessing Officer estimated turnover by applying profit margins on purchases of materials, arguing that this was arbitrary and lacked evidentiary basis. The petitioner also contended that registration under the Commercial Tax Act was only due to statutory thresholds for purchase of materials and did not imply admission of taxable sales.

The State maintained that assessments were made in accordance with statutory provisions and departmental norms, based on returns, books of accounts, and materials on record. The Court noted that the petitioner had not objected to the assessment method before the Assessing Authority or Appellate Authority and had failed to produce evidence negating the deemed sale concept.

The Court upheld the assessment methodology, emphasizing that the tax authorities have the discretion to estimate turnover where actual sale consideration is not recorded, especially in cases involving deferred payment mechanisms like BOT.

Issue 4: Effect of Contractual Indemnity Clause on Tax Liability

The petitioner relied on Clause 19 of the concession agreements, which provided that any liability arising from sales tax or similar levies due to transfer of property would be borne by the respondent authority, effectively indemnifying the petitioner. The petitioner argued that this contractual provision absolved it from tax liability.

The Court did not find this argument sufficient to override statutory tax obligations. It held that contractual indemnity clauses do not exempt a party from statutory liabilities enforceable by the State. Tax liability arises by operation of law and cannot be waived by private agreement.

Conclusions on Issues

The Court concluded that BOT contracts executed by the petitioner constituted works contracts involving transfer of property in goods for valuable consideration, attracting commercial and entry taxes under the relevant Madhya Pradesh statutes. The deferred payment mechanism via toll collection did not negate the taxable nature of the transactions during the construction phase. The petitioner's purchase and use of construction materials during the assessment years constituted taxable turnover, notwithstanding the absence of actual toll revenue or business commencement in the strict sense.

The assessment methodology adopted by the tax authorities was found to be lawful and consistent with statutory provisions, and the imposition of penalties was upheld. Contractual indemnity clauses did not absolve the petitioner from statutory tax liabilities.

Significant Holdings

"As per the definition, there is a payment of the contractor by way of toll on a deferred period i.e. concessional period. Section 2(t)(ii) says that a transfer or property in goods, whether as goods or in some other form, is involved in the execution of a works contract."

"The BOT scheme does not alter the taxable character of the transaction; rather, it represents a deferred payment mechanism."

"The Government always remains the owner of the land both in works contracts or in BOT, and only possession is given to the contractor to construct the road and recover the cost of construction from the public or passengers by way of toll."

"No person has a right to collect a toll or any tax from private persons for using the road. The State Government gave the right to collect the tolls to the petitioner from the vehicles passing through the road for a definite period to recover only the cost of construction."

"Even if money was not paid to the petitioner by the Government during the assessment year, the value of such consideration in money for the purpose of determining the turnover can be fixed by the Assessing Authority because it is a case of deferred payment by State by giving right to recover by way of toll."

"Contractual indemnity clauses do not exempt a party from statutory liabilities enforceable by the State."

The final determination was that the writ petitions challenging the commercial tax and entry tax assessments and revisional orders were devoid of merit and were dismissed. The Court affirmed that the petitioner was liable to pay commercial and entry taxes on the BOT projects during the construction period, notwithstanding the deferred payment mechanism and absence of actual toll collection in the relevant assessment years.