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TMI Blog2012 (11) TMI 978X X X X Extracts X X X X X X X X Extracts X X X X ..... en up for final hearing since common questions are involved. The 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th effect from June 20, 2006, the provisions of Explanation (b)(ii) to section 2(24) were amended by the insertion of the following words after the words "works 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 exec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 995, as applicable on the ast January of the year in which the agreement to sell the property is registered:- Provided that, deduction towards cost of land under this sub-rule shall not exceed 70 per cent of the agreement value." On February 7, 2007 a trade circular was issued by the Commissioner 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :- (i) There has to be a transfer of property in goods; (ii) The expression "goods" is as defined in article 366(12); and (iii) Such transfer has to be in the execution of a works contract; 3. As a result of the Forty-sixth Amendment an indivisible works, contract is by legal fiction made divisible into a contract for supply of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 11 by the promoter in favour of the cooperative society. In support of the principal submissions which have been urged as noted above by Mr. Milind Same and Mr. V. Sridharan, learned senior counsel, the other counsel appearing on behalf of the petitioners in the batch of petitions have urged the following submissions:- 1. Where there is a transfer of a building by a deed of conveyance or a transfer of immovable property that was never intended to constitute a transfer of goods involved in the execution 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 develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limited definition of the expression "sale" in the Sale of Goods Act, 1930 and to isolate the sale of goods element involved, inter alia, in a contract which is a works contract; (f) A works contract is one where there is a contract to do works and it does not cease to be such merely because any other obligation exists. 2. In an agreement which is governed by the MDFA, a conveyance of the interest in the flat or at any rate an interest therein is created at the stage of the execution of an agreement under section 4. The doctrine of accretion is always subject to a contract to the contrary. The provisions of the MOFA contain 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... movables for a price and property passing therein pursuant to that agreement. In a building contract which is, as in the present case, one, entire and indivisible-and that is its norm, there is no sale of goods, and it is not within the competence of the Provincial Legislature under entry 48 to impose a tax on the supply of the materials used in such a contract treating it as a sale." The judgment in Gannon Dunkerley [1958] 9 STC 353 (SC) ; AIR 1958 SC 560, therefore, emphasised that where a building contract is one and indivisible, no sale of goods as such would be involved which could be the subject-matter of a tax on the sale of goods. However, 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 Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;" The validity of the Forty-sixth Amendment: Builders Association In Builders Association of India v. Union of India [1989] 73 STC 370 (SC) ; [1989] 2 SCC 645 the validity of the Forty-sixth Amendment was upheld by a Constitution Bench of the Supreme Court. The Supreme Court rejected the contention which was urged on behalf of the States to the effect that in the case of a works contract the transfer of property in goods passes 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court, has all the incidents of a sale of goods involved in the execution of the works contract where the contract is divisible into one for sale of goods and the other for supply of labour and, services. In the decision in Gannon Dunkerley and Co. [1993] 88 STC 204 (SC) ; [1993] 1 SCC 634, where the Forty-sixth Amendment was construed, the Supreme Court accepted the contention of the States that in order to determine the value of goods involved in the execution of works contracts, it would be open to the States to adopt a convenient mode for such determination by taking the value of a works contract as a whole and to deduct therefrom the cost of labour and services rendered by the contractor during the course of the execution 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The judgment of the Supreme Court notes that all the sub-clauses of article 366 (29A) bring transactions where one or more of the essential ingredients of sale under the Sale of Goods Act, 1930 are absent within the ambit of purchase and sale for the purpose of levy of sales tax. The principle in Gannon Dunkerley [1958] 9 STC 353 (SC) would only to that extent stands modified, The Constitutional Amendment allows by a legal fiction certain specific composite contracts to be made divisible where a sale element could be isolated and be subjected to sales tax. Where a composite contract falls within the description of one of the specific clauses covered by article 366(29A), the legal fiction would come into operation. In such cases, as a consequence of the legal fiction, the contract would have to be construed as being divisible where the sale element could 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 Sanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price. Mere transfer of property in goods used in the performance of a contract is not sufficient; to constitute a sale there must be an agreement express or implied relating to the sale of goods and completion of the agreement by passing of title in the very goods contracted to be sold. Ultimately the true effect of an accretion made pursuance to a contract has to be judged, not by an artificial rule that the accretion may be presumed to have become by virtue of affixing to a chattel, part of that chattel, but from the intention of the parties to the contract." In Ram Singh and Sons Engineering Works v. Commissioner of Sales Tax [1979] 43 STC 195 (SC) ; [1979] 1 SCC 487, the Supreme Court held as follows (page 199 in 43 STC):- "Now, the distinction between a contract of sale and a contract for . work and labour has been pointed out in Halsbury's Laws of England, 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which ordinarily applies, is subject to a contract to the contrary. The judgment of the Supreme Court in Builders Association of India [1989] 73 STC 370 (SC) ; [1989] 2 SCC 645 underlines the principle that the ambit of the expression "works contract" cannot be, restricted to a particular category of works contracts. The judgment of the Supreme Court in Builders Association [1989] 73 STC 370 (SC) ; [1989] 2 SCC 645, emphasises this principle in the following observations (page 403 in 73 STC):- ". . . We, however, make it clear that the cases argued before and considered by us relate to one specie of the generic concept of works contracts'. The case-book is full of the illustrations of the infinite variety of the manifestation of 'works contracts'. Whatever might be the situational differences of individual cases, the constitutional limitations on the taxing-power of 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 sit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a contract for work and labour not involving sale of goods. The third is a contract for sale where the goods are sold as chattels and the work done is merely incidental to the sale. Hudson's Building and Engineering Contracts (Eleventh Edition, page 3) contains an instructive elucidation of a building or engineering contract:- "A building or engineering contract may be defined, for the purposes of this book, as an agreement under which a person, in this book called variously the builder or contractor, undertakes for reward to carry out for another person, variously referred to as the building owner or employer, works of a building or civil engineering character. In the typical case, the work will be carried out upon the land of the employer or building owner, though in some special cases obligations to build may arise by contract where this is not so, for example, under building leases, and contracts for 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen used in singular with reference to constructions it is not confined to only big industrial or scientific constructions. . ." The connotation of the expression "works" in section 9A of the Representation of the People Act, 1951 has been construed by the Supreme Court in Kartar Singh Bhadana v. Hari Singh Nalwa [2001] 4 SCC 661. Works contracts have varying connotations. The scale and complexity of commercial transactions in modern times has increased on a scale that has been unprecedented before. The need to structure an efficient business organisation and to achieve economies of scale in business transactions has not only led to cost cutting in business, Negotiations have become complex before contracts are settled. Contractual conditions and stipulations display a high degree of sophistication as promoters of business work themselves around meeting the requirements of legal and regulatory regimes. The modern complexity of business is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are to be taken or are taken on ownership basis, is required to produce information and documents mentioned in the provision. The information which is required to be disclosed by the promoter includes a disclosure about the nature of the title to the land, of encumbrances oh the land, inspection of plans and specifications of the building, the nature of the fixtures, fittings and amenities, prescribed particulars as respects the design and materials to be used in the construction of the building and the date by which possession would be handed over. A promoter is also required to disclose the outgoings inclusive of ground rent and municipal taxes, the carpet area of flats, the price of the flat including the proportionate price of the common areas and facilities and the nature, extent and description of the common areas and facilities. Under section 4 the promoter is required, before accepting any money as advance payment, to enter into a registered agreement 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 ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, ground rent and other public charges in accordance with his agreement with the promoter. Two decisions of learned single judges of this court have adverted to the special nature of the obligations which are cast upon the promoter under the MOFA. In Vrindavan (Borivali) Co-operative Housing Society Ltd. v. Karmakar Brothers [1983] 2 Bom C.R. 267, a learned single judge of this court noted that an agreement under the MOPA is not an ordinary agreement like a contract of sale because it is required to be executed in conformity with the provisions of section 4 and has to be registered. The agreement involves a statutory compulsion to provide certain terms. Consequently the learned single judge noted that an agreement under the MOFA cannot be equated with an ordinary contract of safe and a suit seeking enforcement of those obligations could not be regarded as an ordinary suit for specific performance of a contract of sale. A similar view was taken in a subsequent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Bombay Stamp Act, 1958 in State of Maharashtra v. Mahavir Lalchand Rathod [1992] 2 Bom. C.R. 1. The Division Bench dealt with a batch of petitions where agreements for sale were executed in terms of section 4 of the MOFA. These agreements were impounded by the registering authority and the issue which was raised before the Division Bench was whether they were liable to stamp duty under the Act. The Division Bench, after adverting to the terms of the agreement and to section 2(g), came to the conclusion that though the agreements were described as agreements to sell, they were in effect and for all purposes conveyances falling under section 2(g) inasmuch as the right, title and interest in the flat would stand transferred in favour of the purchaser on the payment of instalments. The Division Bench noted that there is no clause in the agreement which required the developer to execute any other deed of conveyance at a later stage. The Division Bench held that it was difficult to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by the Supreme Court in Jayantilal Investments [2007] 9 SCC 220. Agreements governed and regulated by the MOFA are not agreements to sell simpliciter, as construed in common law. The Legislature has intervened to impose statutory obligations upon promoters; obligations of a nature and kind, that are not traceable to the ordinary law of contract. Correspondingly, the rights which are conferred upon flat purchasers transcend those which prior to the enactment of the legislation would have been available under ordinary contractual conditions. The legislation now defines the content of the contract, by mandating the form of the contract and the stipulations which it must contain. The Legislature has created rights in purchasers and imposed obligations upon promoters. The Act regulates promotion and construction. The work which the promoter carries on is regulated to protect the interests of the purchasers. Every stage, including the disclosure of plans and specifications, the execution 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain the description of the building, the number of storeys and basements, the number of apartments and the principal materials of which it is or is to be constructed. The words "is to be constructed" are indicative of, the fact that a declaration is contemplated even before the construction is complete. An interest in the flat and in the common areas and facilities arises under the law even at that stage. The declaration is also to provide for the value of the property and of each apartment and percentage of undivided interest in the common areas and facilities. Section 12 provides for contents of a deed of apartment. The provisions of the Apartment Ownership Act/1970 hence recognize an interest of the purchaser of an apartment, not only in respect of the apartment which forms the subject-matter of the purchase, but an undivided interest, described as a percentage in the common areas and facilities. The constitutional validity of the provisions of the MVAT Act, 2002, as amended, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances of taxes which fall within clauses (a) to (f) of article 366(29A) fall within the ambit of entry 54. State legislation which meets the description of article 366(29A) is hence legislation which would fall within entry 54 of List II. In order to meet the description contained in clause (b), State legislation must provide for a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. Such a transfer shall be deemed to be a sale by a person making the transfer and a purchase of those 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 requireme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C 634 specifies the nature of such deductions which can be made from the entire value of the works contracts. This was permitted to the States as a convenient mode for determining the value of the goods in the execution of the works contract. Similarly, the cost of the land is required to be excluded from the total agreement value. Sub-rule (1A) stipulates that the cost shall be determined in accordance with the guidelines appended to the Annual Statement of Rates prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 as applicable on January 1 of the year in which the agreement to sell the property is registered. The proviso stipulates that deduction towards the cost of land under the sub-rule shall not exceed 70 per cent of the agreement value. The petitioners have not brought on the record any material to indicate that the proviso to sub-rule (1A) of rule 58 is arbitrary. Rule 58(1A) provides for the measure of the tax. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emains a works contract within the meaning of the term as defined under the said Act. It must be clarified that if the agreement is entered into after the flat of unit is already constructed, then there would be no works contract. But so long as the agreement is entered into before the construction is complete it would be a works contract." The attention of the court has been drawn to the fact that the decision in K. Raheja [2005] 141 STC 298 (SC) ; [2005} 5 SCC 162, has now been placed for consideration before a Larger Bench. The judgment in K. Raheja [2005] 141 STC 298 (SC) ; [2005] 5 SCC 162, did not involve a challenge to the Constitutional validity of the provisions of the Karnataka Act and the proceedings before the Supreme Court arose from the proceedings for assessment. We have independently considered the constitutional challenge to the provisions of section 2(24) of the Maharashtra Value Added Tax Act and the Rules and hold it to be lacking in substance. As regards the challenge 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 composit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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