Major Relief to Developers in Haryana on VAT libaility and Valuation of Goods for impsition of VAT in Works Contract clarified by High Court of Punjab & Haryana in the case of CHD Developers.

[Pramod Rai]

The PandH H.C. has pronounced the judgment in the case of CHD Developers v State of Haryana and Ors. [2015 (4) TMI 784 - PUNJAB AND HARYANA HIGH COURT] wherein challenge was made to the provisions of the HVAT Act and was argued that the Act was imposing VAT on the value of land (VAT on sale of immovable property) as there were no provisions for deduction of the value of land while calculating the taxable turnover. The only deduction was allowed for ‘labour and services’, and many other necessary exclusions were not provided for.

The Hon’ble HC was pleased to grant stay in March 2014 and the matter was reserved for orders in September 2014. The judgment was delivered in the open court today.

*Following are the salient features of the judgment which were highlighted by the Court while pronouncement:

1. It has been held that the activity of Developers is covered within the meaning of Works Contract. [Para: 30].

2. Then the Hon’ble Court dealt elaborately with the principles for determination of taxable turnover in case of builders [Para 31].
   1. If proper books maintained: It has been held that Taxable turnover is to be determined as per Actual Books maintained by the developer, and shall be the value of goods incorporated in the execution of works contract.
   2. If proper books not maintained: In case the books are not maintained or are not found worthy of credence, it would be permissible for the State Legislature to prescribe a formula for determining the charges for labour, service and cost of land by fixing a particular percentage of the works contract and to allow deduction of the amount thus determined from the value of the works contract for assessing the value of the goods involved in the execution of the works contract.

3. Regarding taxability and valuation in case of builder’s contracts, it has been further held in the judgment that: [para 31 and 44]

1. Taxable event is the transfer of property in the goods involved in the execution of a works contract.
2. The said transfer of property in such goods takes place when the goods are incorporated in the works.
3. The value of the goods which can constitute the measures for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in the works.
4. The activity of construction undertaken by the developer would be works contract only from the stage he enters into a contract with the flat purchaser.
5. Where the agreement is entered into after the completion of the flat or the unit, there would be no element of works contract.
6. Materials on which the Sub contractor has paid tax to be excluded: No tax can be charged from the developer in respect of the value of goods incorporated in the works contract after the agreement with the flat purchaser on which the sub‑contractor has already paid the tax. However the validity of section 42 of the HVAT Act was upheld.
7. In case the provisions of law are seeking to charge sales tax on any amount other than the value of goods transferred in course of execution of works contract, the provisions would be ultra vires the Constitution of India.

4. Regarding Deductive method for computation of value of goods

1. In case the Legislature/ Government provides for a deductive method for computation of value on which sales tax is to be paid rather than taking value of materials as the basis, the court held as follows:
   1. The 'deductive method' requires all the deductions to be made therefrom to be specifically provided for to ensure that tax is charged only on the value of transfer of property in goods on and after the date of entering into agreement for sale with the buyers.
   2. Where 'deductive method' has been prescribed under the rules for ascertaining the taxable turnover, ordinarily it should include a residuary clause in consonance with the mandate of law so as to cover all situations which can be envisaged.
2. The Court thus agreed with our contention that in case of Builders/ Developers there are several heads of expenditure which have no bearing with transfer of property in goods in execution of works contract, and the same cannot be charged to sales tax. These expenses have been illustratively noted by the Court in Para 32 of the judgment.
3. It is interesting to note clause 13 and 14 of para 32 wherein the petitioners mentioned residuary expenses which are not related to transfer of property in goods, and submitted that the same are to be excluded for determining the value of materials. The said contention has been accepted by the Court in Para 44.

5. Ultimately, the Court read down the provisions of rule 25 of the HVAT Rules in line with above observations of the Court and also mandated the State to amend the provisions of rule 25 in line with its judgment.

6. Validity of provisions of lumpsum taxation: Constitutional validity of Section 9 and rule 49 regarding lump sum schemes have been upheld, and the Circular dated 14.2.2014 was also accordingly upheld.

7. Fate of the Orders and Notices: the way forward

Assessment/ revision Orders issued to the assessees which were challenged before the Court have been quashed and the authorities have been directed to frame assessments afresh. Where only notices were issued, authorities have been mandated to proceed with the notices to frame assessments in line with above observations.

8. This judgment has given much needed respite to developers in the State of Haryana. Previously the department was framing assessments on exorbitant amounts and was seeking huge demands after the Larger Bench judgment of the Hon’ble Supreme Court in the case of Larsen and Toubro [2013 (9) TMI 853 - SUPREME COURT].

9. The Hon’ble High Court of Punjab and Haryana, in the present case has set right the law and provided much needed guidance on valuation for charging VAT. The court has stated that VAT can be charged only on goods incorporated in the execution of Works Contract after the date of entering into agreement and on nothing else other than that. The Court has also clarified that there shall be no liability of VAT on the Developer in case the same has been deposited by the sub-contractor.

10. In the present case, not just the High Court has provided guidance for valuation for computation of VAT in Works Contract, but has also paved the way forward for jurisprudential development of law on this subject in the entire country and the judgment is set to become a landmark decision.

This issue was conceived and pursued by the team comprising of Mr. Puneet Agrawal (Partner) and Mr. Dipankar Majumdar, Advocates of Athena Law Associates, New Delhi.​ Athena Law Associates is Tax Knowledge Partner of CREDAI NCR and Builders and Developer’s Forum, and was engaged by the Real Estate CFO Group for this matter.