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2015 (4) TMI 784 - PUNJAB AND HARYANA HIGH COURT

2015 (4) TMI 784 - PUNJAB AND HARYANA HIGH COURT - [2015] 81 VST 344 (P&H) - Inclusion of value of land for charging Value Added Tax - development and sale of apartments/flats/units - Constitutional validity of Explanation (i) to Section 2(1)(zg) of the Haryana Value Added Tax Act, 2003 and Rule 25 (2) of the Haryana Value Added Tax Rules, 2003 - Violation of Article 246 of the Constitution of India read with Schedule VII, List II, Entry 54 - Claim of refund the tax already paid in so far as it .....

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planation (i) to Section 2(1)(zg) of the Act which defines “sales price” provides for deduction on account of labour, material and services related charges from the gross turnover as defined under Section 2(1)(u) of the Act while arriving at the “sale price” in a works contract. It is not a charging provision which creates any liability for assessing VAT in a “works contract”. It is in the definition clause of the Act and the provision does not embrace within its ambit something which is otherwi .....

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nsferred after the agreement is entered into with the flat purchaser. The 'deductive method' thereunder does not provide for any deduction which relate to the value of the immovable property. The legislature has not made any express provision for exclusion of value of immovable property from the works contract and its method of valuation has been left to the discretion of the rule making authority to prescribe.

Apex Court in M/s. Larsen & Toubro Limited & Another Versus State of Karna .....

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he value of goods at the time of incorporation and does not purport to tax the transfer of immovable property."

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. The tax is to be computed on a value not exceeding the value of transfer of property in goods on and after the date of entering into agreement for sale w .....

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which can be envisaged.

Essentially, the value of immovable property and any other thing done prior to the date of entering of the agreement of sale is to be excluded from the agreement value. The value of goods in a works contract in the case of a developer etc. on the basis of which VAT is levied would be the value of the goods at the time of incorporation in the works even where property in goods passes later. Further, VAT is to be directed on the value of the goods at the time of .....

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rk executed through a subcontractor, whether in whole or in part, it shall be the joint and several liability of the contractor and the sub-contractor. Sub-section (2) of Section 42 thereof clarifies that a contractor shall not be under any liability to pay tax in respect of a “works contract”, if the same has been paid by a sub-contractor and that his assessment has become final. This provision only safeguards the interest of the revenue in the event of failure on the part of the sub contractor .....

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ontractor gets the construction work executed through a subcontractor, whether in whole or in part, it shall be the joint and several liability of the contractor and the sub-contractor. Sub-section (2) of Section 42 thereof clarifies that a contractor shall not be under any liability to pay tax in respect of a “works contract”, if the same has been paid by a sub-contractor and that his assessment has become final. This provision only safeguards the interest of the revenue in the event of failure .....

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Liguous v. Deputy Commissioner of Sales Tax [2014 (3) TMI 782 - SUPREME COURT], the method of determining tax liability under these provisions could not be questioned by such a dealer. In view of the above, circular dated 10.2.2014 cannot be faulted.

The assessment orders and revisional orders passed by the concerned authorities are liable to be set aside with liberty to the appropriate authority to pass fresh orders in the light of the legal principles enunciated - Decided partly in .....

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of 2014). Mr. Gajendra Maheshwari, Advocate and Mr. Puneet Siddhartha, Advocate for the petitioner(s) (in CWP Nos. 7720, 8338, 8339, 12387 and 12429 of 2014). Mr. Bhupeshwar Jaswal, Advocate for Mr. Mukul Aggarwal, Advocate for the petitioner (in CWP No. 7832 of 2014). Mr. Ashwani Chopra, Senior Advocate with Mr. Pankaj Gupta, Advocate for the petitioner (in CWP No. 7834 of 2014). Mr. Shammi Kapoor, Advocate and Ms. Megha Suri, Advocate for the petitioner (in CWP No. 7908 of 2014). Mr. Rajesh Go .....

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ha Peshawaria, DAG, Haryana with Mr. M.K. Dutta, Advocate for State of Haryana. JUDGMENT Ajay Kumar Mittal, J. 1. This order shall dispose of a bunch of 65 petitions bearing CWP Nos. 5730, 5731, 5746, 5751, 5753, 5754, 5755, 6043, 6044, 6050, 6051, 6119, 6132, 6135, 6142, 6143, 6148, 6149, 6165, 6199, 6224, 6250, 6363, 6845, 7138, 7440, 7441, 7575, 7614, 7720, 7832, 7833, 7834, 7908, 8093, 8338, 8339, 9314, 9342, 9364, 9370, 9456, 9748, 10027, 10029, 10030, 10342, 10404, 10405, 10408, 10409, 104 .....

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dded Tax Act, 2003 (in short the Act ) and Rule 25 (2) of the Haryana Value Added Tax Rules, 2003 (hereinafter referred to as the Rules ) (Annexure P-1 Colly) in particular and other related provisions in so far as they include the value of land for charging Value Added Tax (for brevity VAT ) on developers to be ultra vires the Constitution of India in so far as it violates Article 246 of the Constitution of India read with Schedule VII, List II, Entry 54; for issuance of a writ in the nature of .....

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me writ petitions, assessment orders passed by the assessing authority whereas in other writ petitions, the revisional order passed by the revisional authority on the basis of circulars and aforesaid provisions have also been assailed. In some cases, validity of Section 42 and Section 9 of the Act read with Rule 49 of the Rules has also been challenged. 3. Briefly stated, the facts necessary for adjudication of the instant writ petition as narrated therein may be noticed. The petitioner is a dev .....

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ly, a circular dated 4.6.2013 was issued regarding making of assessments on builders and developers. Subsequently, vide circular dated 10.2.2014, the circular dated 7.5.2013 was varied and value of the land was sought to be included for imposition of VAT. Notices (Annexure P-3 Colly) for re-assessment for the year 2010-11 under Section 17 of the Act were issued for imposing tax on the transaction of sale of flats, floors and villas amounting to ₹ 42,98,90,718/- as being under assessed. The .....

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filing written statement. It was pleaded therein that the issue regarding applicability and levy of VAT on builders and developers engaged in the activities of construction of building, flat and commercial properties and selling the same to the prospective buyers which the petitioners are contesting by way of the present writ petitions has already been settled by the Apex Court in M/s Larsen & Toubro Limited v. State of Karnataka (2013) 46 PHT 269 (SC) wherein it was held that the builders .....

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into by the petitioner (s) with its prospective buyers for construction and sale of flats/apartments/villas/commercial projects against valuable consideration. Hence, the activity was covered by the definition of the expression 'works contract' as contained in Section 2(1) (zt) of the Act. Further, the definition of 'sale' as contained in clause (ze) of Section 2(1) of the Act covers the activities of 'works contract' which is similar to that of the VAT Act of Karnataka. .....

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se (supra), the respondents were satisfied that the petitioner has incurred liability for payment of VAT under the Act and accordingly, they have issued notice asking the petitioners to furnish requisite details to enable them to quantify correct tax liability under the Act. It was further pleaded that the respondents have initiated assessment proceedings under the Act to determine the actual tax liability of the petitioners and had provided reasonable opportunity of being heard to represent dur .....

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iable to tax involved in the execution of the works contract under the Act and no notice proposing levy of tax on value of land has been issued by them. According to the respondents, the circulars dated 7.5.2013 (Annexure P-2), dated 4.6.2013 and dated 10.2.2014 were issued by respondent No.2 which related to works contractors and developers/ builders so as to remove some confusion amongst the departmental officers in determining the gross turnover and deductions allowable therefrom and consider .....

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rments made in the writ petitions were denied and a prayer for dismissal of the same was made. 5. Learned counsel for the petitioners submitted that the builders/developers were not works contractors as they were engaged in sale of immovable property. It was argued that the provisions of Explanation (i) to Section 2(1)(zg) of the Act and Rule 25(2) of the Haryana Value Added Tax Rules were ultra vires the Constitution of India as under Entry 54 List II of Seventh Schedule to the Constitution of .....

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or sales-tax have to be specifically excluded by way of express and specific provisions and if any of the elements remain unspecified, the provisions shall be ultra vires the Constitution. Reference was made to definition of sale price in Section 2(ad) of UP VAT Act, 2008 which allows deduction for charges for labour, services and other prescribed amounts while Rule 9 of the Rules framed thereunder relates to determination of turnover of sale of goods involved in execution of works contract wher .....

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the provisions under the Act and Rules were indeed leading to inclusion of value addition in immovable property thereof whereas the Supreme Court in M/s Larsen & Toubro Limited's case (supra) had held that the State had the power to charge tax only on value additions in goods, property in which gets transferred after entering into agreement with the buyer. It was further contended that when the definition of 'works contract' was to be read with the definition of 'sale price& .....

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and subcontractor involved in the execution of the works contract. Section 42(2) of the Act provides that in case the main contractor proves to the satisfaction of the assessing authority that the tax has been paid by the sub-contractor and the assessment of such tax has become final, then he shall not be liable to pay tax on the sale of such goods. According to the learned counsel, taxing the contractor and sub-contractor for the same sale amounted to double tax and there could not be two deeme .....

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f the VAT is levied on the element of transfer of immovable property in the composite contract by bringing it within the scope of term 'works contract', then to that extent the transaction should not be treated as conveyance as the property passes not by conveyance but by the agreement which was considered to be an agreement for construction. Therefore, the stamp duty cannot be charged treating the transaction as conveyance and stamp duty, if any, paid till date, becomes refundable. The .....

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C), Commissioner of Income Tax, Gujarat v. Vijaybhai N. Chandrani 2013 (14) SCC 661, M/s Alcatel India Ltd., New Delhi v. State of Haryana, (2003) 22 PHT 418 (P&H) and Larsen & Toubro Limited v. State of Haryana and others, (2013) 57 VST 453 (P&H). Challenging the merits of the claim of the petitioners as well, it was urged that the method of calculation of value of land for the purposes of levying VAT adopted by the State was totally in conformity with the principles laid down by th .....

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and the Rules, the validity of which have been challenged by the petitioners, were in conformity with law. 7. We have heard learned counsel for the parties. 8. Noticing the contentions of learned counsel for the parties, the following primary issues emerge for our consideration:- (i) Whether the developers and builders are works contractors and the agreement between the developer/builder/promoter and the prospective purchaser to construct a flat and thereafter sell the same with some portion of .....

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provisions of Section 42 of the Act and also Section 9 of the Act read with Rule 49 of the Rules would qualify to be legal and valid? (iv) Whether the alternative remedy of appeal etc. would debar this Court to entertain the present writ petitions? 9. Adverting to first issue, necessarily one has to make reference to the following:- (a) Statutory provisions (b) Legislative history relating to taxability of 'works contract' and constitutional provisions. 10. Learned counsel for the petit .....

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ler as consideration for the sale of any goods, less any sum allowed at the time of sale as cash or trade discount according to the practice, normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof and the expression purchase price shall be construed accordingly. Explanation (i) appended thereto, which is material for resolving controversy involved herein, provides that in relation to .....

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such percentage as may be prescribed. 11. Section 2(1)(zn) of the Act defines taxable turnover to mean that part of the gross turnover which is left after making deductions therefrom in accordance with the provisions of section 6; plus purchase value of goods liable to tax under sub-section (3) of section 3. Under Section 2(1)(zt) of the Act works contract includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the assembling, construction, building, .....

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fore sale or under the contract of sale. The definition of gross turnover falls under Section 2(1)(u) of the Act in the following terms:- (u) gross turnover when used in relation to any dealer means the aggregate of the sale prices received or receivable in respect of any goods sold, whether as principal, agent or in any other capacity, by such dealer and includes the value of goods exported out of State or disposed of otherwise than by sale; Explanation. - (i) The aggregate of prices of goods i .....

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manner prescribed. (iii) Any amount collected by the dealer by way of tax shall not be included in the gross turnover and where no tax is shown to have been charged separately, it shall be excluded from the taxable turnover (denoted by TTO ) taxable at a particular rate of tax in per cent (denoted by r ) by applying the following formula - tax = r X TTO/100 + r illustration - If TTO is 220 and r is 10 (per cent), tax will be 20. 12. Section 3 of the Act relates to 'Incidence of tax' whic .....

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he tax levied under sub-sections (1), (2) and (3) shall be calculated on the taxable turnover, determined in accordance with the provisions of section 6, at the rates of tax applicable under section 7, and where the taxable turnover is taxable at different rates of tax, the rate of tax shall be applied separately in respect of each part of the taxable turnover liable to a different rate of tax. (5) to (7) XX XX XX 13. Reference was also made to Section 6 of the Act which provides for determinati .....

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in the course of the export of the goods out of the territory of India; (e) turnover of export of goods out of State; (f) turnover of disposal of goods otherwise than by sale; (g) turnover of sale of exempted goods in the State; (h) turnover of sale of goods to such foreign diplomatic missions/consulates and their diplomats, and agencies and organisations of the United Nations and their diplomats as may be prescribed; and (i) turnover of sale of goods returned to him, subject to such restrictio .....

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part of the gross turnover; and (iii) for the purpose of clause (i), the aggregate of the sale prices of goods which is or has been part of gross turnover (including under the Act of 1973). Note. - 2. If the turnover in respect of any goods is included in a deduction under any clause of this subsection, it shall not form part of deduction under any other clause of the sub-section. (2) The deductions mentioned in sub-section (1) shall be admissible on furnishing to the assessing authority in such .....

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s, in lieu of tax payable under this Act, for any period, by way of composition, a lump sum linked with production capacity or some other suitable measure of extent of business, or calculated at a flat rate of gross receipts of business or gross turnover of purchase or of sale or similar other measure, with or without any deduction therefrom, to be determined by the State Government, and such lump sum shall be paid at such intervals and in such manner, as may be prescribed, and the State Governm .....

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) A dealer in whose case composition under subsection (1) is made and is in force may, subject to such restrictions and conditions, as may be prescribed, opt out of such composition by making an application containing the prescribed particulars in the prescribed manner to the assessing authority, and in case the application is in order, such composition shall cease to have effect on the expiry of such period after making the application as may be prescribed. 15. Section 42 of the Act provides fo .....

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he execution of the works contract by the subcontractor. (2) If the contractor proves to the satisfaction of the assessing authority that the tax has been paid by the sub-contractor on the sale of the goods involved in the execution of the works contract by the subcontractor and the assessment of such tax has become final, the contractor shall not be liable to pay tax on the sale of such goods but he shall be entitled to claim input tax, if any, in respect of them if the same has not been availe .....

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hall not be liable to pay tax on such goods but he shall be entitled to claim input tax, if any, in respect of them if the same has not been availed of by the agent. 16. Rules 25(2) and 49 of the Rules were also referred to by the learned counsel for the petitioners. Rule 25 (2) of the Rules provides for certain exclusions to be made while computing the taxable turnover for a works contractor:- 25. Computation of taxable turnover.-(2)(a) In case of turnover arising from the execution of the work .....

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i) charges for planning and architect s fees; (iii) 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; (iv) cost of establishment of the contractor to the extent it is relatable to supply of labour and services; (v) other similar expenses relatable to supply of labour services; (vi) profit earned by the contractor to the extent it is relatable to supply of .....

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with lump-sum tax as under:- 49. Lump sum scheme in respect of contractors. (1) A contractor liable to pay tax under the Act may, in respect of a work contract awarded to him for execution in the State, pay in lieu of tax payable by him under the Act on the transfer of property (whether as goods or in some other form) involved in the execution of the contract, a lump sum calculated at four per cent of the total valuable consideration receivable for the execution of the contract, by making an ap .....

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hereof as relates to total cost and payments. (2) The application shall be signed by a person authorised to make an application for registration. On receipt of the application, the assessing authority shall, after satisfying itself him that the contents of the application are correct, allow the same. (3) The lump sum contractor shall be liable to make payment of lump sum quarterly calculated at four per cent of the payments received or receivable by him during the quarter for execution of the co .....

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month of the close of the quarter and shall pay lump sum, if any, due from him according to such return after adjusting the amount paid under sub-rule (4). (5) The lump sum contractor shall be entitled to make purchase of goods for use in execution of the contract both on the authority of declaration in Central Form C as well as Form VAT-D1 prescribed under clause (a) of sub-section (3) of section 7 and for this purpose he shall be deemed as a manufacturer. (6) The lump sum contractor shall main .....

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ontract awarded to him after the award of the contract in respect of which he first elected to pay lump sum and he shall continue to pay tax in respect of contracts awarded before as if he is not a lump sum contractor. (8) A lump sum contractor may at any time by appearing before the appropriate assessing authority himself or through an authorised agent express in writing his intention to opt out of the scheme of payment of lump sum in lieu of tax payable under the Act. Such contractor in respec .....

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an authorised agent within ninety days of such revision and expressing in writing his intention to opt out of the scheme of payment of lump sum. Such contractor shall be liable to pay lump sum for the period before the revision in lump sum rate at the un-revised rate and in respect of transfer of property in any goods, whether as goods or in some other form, involved in the execution of the contract(s) thereafter he shall be liable to pay tax as a contractor not being a lump sum contractor. 18. .....

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rliament passed the Constitution (Sixth Amendment) Act, 1956 which received the assent of the President on 11.9.1956. By the said amendment, Entry 92-A in List I of the Seventh Schedule to the Constitution of India was added in the following terms:- 92-A.Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce. In List II existing Entry 54 was substituted by the following entry:- 54. Taxes on the sale or .....

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of Madras. In this case the Apex Court held that on a true interpretation of the expression "sale of goods" meant an agreement between the parties for the sale of the very goods in which eventually property passed. In a building contract where the agreement between the parties was that the contractor should construct the building according to the specifications contained in the agreement and in consideration therefor received payment as provided therein, there was neither a contract to .....

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ing as in the Sale of Goods Act, 1930. It was concluded that in a building contract which was one, entire and indivisible, there was no sale of goods and it was not within the competence of the Provincial Legislature under Entry 48 in List II in Schedule VII of the Government of India Act, 1935, to impose a tax on the supply of the materials used in such a contract treating it as a sale. The Supreme Court had noted in subsequent decisions that the said decision though was rendered on the basis o .....

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nsactions, in which property in goods passed but were not considered as sales for the purpose of levy of sales tax, within the scope of the power of the States to levy sales tax. By the 46th Amendment a new clause, namely clause (29A) was introduced in Article 366 of the Constitution. Clause (29A) of Article 366 of the Constitution reads thus: 366, Definitions.-In this Constitution, unless the context otherwise requires, the following expressions have the meaning hereby respectively assigned to .....

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e right to use any goods. for any purpose (whether or not for a specified period)for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part. of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not int .....

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h Amendment the works contract which was an indivisible one, by a legal fiction created in Article 366(29A)(b), was altered into a contract which was divisible into one for sale of goods and the other for supply of labour and services. Thus, it has become possible for the States to levy sales tax on the value of goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods and materials supplied in a building contract which had been entered into .....

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including all materials, commodities and articles. Sub-clause (b) of clause (29-A) states that 'tax on the sale or purchase of goods' includes among other things a tax on the transfer of property in the goods (whether as goods or in some other form) involved in the execution of a works contract. The emphasis is on the transfer of property in goods (whether as goods or in some other form). While referring to the transfer, delivery or supply of any goods that takes place as per sub-clauses .....

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the person making the transfer and a purchase of those goods by the person to whom such transfer is made. The introduction of new definition in clause (29-A) of Article 366 of the Constitution had enlarged the scope of 'tax on sale or purchase of goods' wherever it occurred in the Constitution to include within its scope the transfer, delivery or supply of goods that may take place under any of the transactions referred to in sub-clause (a) to (f) thereof wherever such transfer, deliver .....

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ubject to under the Constitution. 25. Interpreting the provisions of Article 366(29A) of the Constitution of India, the Constitution Bench of the Apex Court in Builders' Association of India and others v. Union of India (1989) 2 SCC 645 had laid down as under:- 39. In view of the foregoing statements with regard to the passing of the property in goods which are involved in works contract and the legal fiction created by clause (29-A) of Article 366 of the Constitution it is difficult to agre .....

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ut forward the plea that on the passing of the 46th Amendment the Constitution had conferred on the States a larger freedom than what they had before in regard to their power to levy sales-tax under Entry 54 of the State List. The 46th Amendment does no more than making it possible for the States to levy sales tax on the price of goods and materials used in works contracts as if there was a sale of such goods and materials. We do not accept the argument that sub-clause (b) of Article 366(29A) sh .....

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titution Bench in the case of Bengal Immunity Company Ltd. (supra) in which this Court has held that the operative provisions of the several parts of Article 286 which imposes restrictions on the levy of sales tax by the States are intended to deal with different topics and one could not be projected or read into another and each one of them has to be obeyed while any sale or purchase is taxed under Entry 54 of the State List. 41. We, therefore, declare that sales tax laws passed by the Legislat .....

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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 situational modifications. 42. T .....

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power to the peripheries of the social limits of that power and, perhaps, even of the constitutional limits of that power in dealing with unequals. In such class of cases 'building activity' really relates to a basic subsistential necessity. It would be wise and appropriate for the State to consider whether the requisite and appropriate classifications should not be made of such building activity attendant with such social purposes for appropriate separate treatment. These of course are .....

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the accounts maintained by him are not found to be worthy of credence by the assessing authority. In that event, a question would arise as to how the deduction towards the aforesaid heads may be made. On behalf of the States, it has been urged that it would be permissible for the State to prescribe a formula on the basis of a fixed percentage of the value of the contract as expenses towards labour and services and the same may be deducted from the value of the works contract and that the said fo .....

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the amount thus determined from the value of the works contract for the purpose of determining the value of the goods involved in the execution of the works contract. It must, however, be ensured that the amount deductible under the formula that is prescribed for deduction towards charges for labour and services does not differ appreciably from the expenses for labour and services that would be incurred in normal circumstances in respect of that particular type of works contract. Since the expe .....

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x for all goods involved in the execution of a works contract even though different rates of tax are prescribed for sale of such goods. The learned Counsel for the contractors have urged that it would not be permissible to impose two different rates of tax in respect of sale of the same article, one rate when the article is sold separately and a different rate when there is deemed sale in connection with the execution of a works contract. On behalf of the States it has been submitted that it is .....

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o. v. State of Andhra Pradesh, 1983(1) SCR 404, at p. 411, P.M. Ashwathanarayan Shetty and Ors. v. State of Karnaiaka and Ors., 1988 Supp. (3) SCR 155 at p. 188; Federation of Hotel & Restaurant Association of India v. Union of India, : [1989]178 ITR 97(SC) ; and Kerala Hotel & Restaurant Association and Ors. v. State of Kerala and Ors.: [1990] 1SCR 516. Imposition of sales tax at different rates depending on the value of the annual turnover was upheld in S. Kodar v. State of Kerala : [1 .....

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hen incorporated in the works can be classified into a separate category for the purpose of imposing the tax and a uniform rate may be prescribed for sale of such goods. 51. The aforesaid discussion leads to the following conclusions:- (1) In exercise of its legislative power to impose tax on sale or purchase of goods under Entry 54 of the State List read with Article 366 (29-A)(b), the State Legislature, while imposing a tax on the transfer of property in goods (whether as goods or in some othe .....

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ile defining the expression 'sale' in the sales tax legislation it is open to the State Legislature to fix the situs of a deemed sale resulting from a transfer falling within the ambit of Article 366(29-A)(b) but it is not permissible for the State Legislature to define the expression "sale in a way as to bring within the ambit of the taxing power a sale in the course of interstate trade or commerce, or a sale outside the State or a sale in the course of import and export. (4) The t .....

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of levying the tax referred to in Article 366(29-A)(b), it is permissible to take the value of the works contract as the basis and the value of the goods involved in the execution of the works contract can be arrived at by deducting expenses incurred by the contractor for providing labour and other services from the value of the works contract. (6) The charges for labour and services which are required to be deducted from the value of the works contract would cover (i) labour charges for execut .....

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ces; and (viii) profit earned by the contractor to the extent it is relatable to supply of labour and services. (7) To deal with cases where the contractor does not maintain proper accounts or the account books produced by him are not found worthy of credence by the assessing authority the legislature may prescribe a formula for deduction of cost of labour and services on the basis of a percentage of the value of the works contract but while doing so it has to be ensured that the amount deductib .....

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tract which rate may be different from the rates of tax fixed in respect of sales or purchase of those goods as a separate article. 27. On another occasion, where the developers were undertaking to build for the prospective purchasers on payment of the price in various installments set out in the agreement for such construction/development, the issue of taxability under VAT was considered by a two Judge Bench of the Apex Court in K. Raheja Development Corporation v. State of Karnataka (2005) 5 S .....

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the Holders, directly from the Vendors, of an undivided fractional interest in the said land (i.e. the area of 5910.17 sq. metres described in the First Schedule hereunder written) and such owner of units would own, on ownership basis, the respective units on condition that an Agreement would be entered into between the Holders on the one hand and the persons (desiring to acquire on ownership basis a unit in such multi-storeyed building) on the other hand and it would be an essential, integral a .....

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of and as Developers of such person would construct for, as a unit ultimately to belong to such person a unit or units that would be so mutually selected and settled by and between K. Raheja Development Corporation and the person concerned; r) The Prospective Purchaser is interested in acquiring ownership rights in respect of unit/s Nos. 1101 on the eleventh floor/s of the said multi-storeyed building named Raheja Towers' and also car parking space/s No./s nil in the basement/ground floor of .....

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ed and quantified consideration of ₹ 3,25,000/- (Rupees three lacs twenty five thousand only) to be paid by the Prospective Purchaser to the Holders at the time and in the manner stated in Clause 2 hereof; b) K. Raheja Development Corporation, (as Developers) agree to build the said building named Raheja Towers', having the specifications and amenities therein set out in the Second Schedule hereunder written and as Developers for the prospective Purchaser, the Developers shall build fo .....

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s and provisions are express conditions to be observed, performed and fulfilled by the Prospective Purchaser, on the basis of which this Agreement has been entered into by the Holders/Developers and the due and proper fulfillment whereof are to be conditions precedent to any title being created and/or being capable of being documented by the Prospective Purchaser in the aforesaid fractional interest in the land described in the First Schedule hereunder written and/or in the said premises: a) XX .....

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premises unless and until the Prospective Purchaser has paid in full through the Holders the full consideration money payable to the Holders under Clause 2 above and the full consideration money payable to the Developers under Clause 3 above. XX XX XX 7. If the Prospective Purchaser commits default in payment of any of the instalments of consideration aforesaid on their respective due dates (time being the essence of the contract) and/or in observing and performing any of the terms and conditio .....

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ance amounts of the installments of part payment, if any, which may have till then been paid by the Prospective Purchaser to the Holders and the Developers respectively but without any further amount by way of interest or otherwise. On the Holder/Developers terminating this Agreement under this Clause, they shall be at liberty to dispose off the said Unit/s and the said fractional interest in the land to any other person as they deem fit, at such price as they may determine and the Prospective P .....

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is committed by the purchaser. However, merely having such a clause does not mean that the agreement ceases to be a works contract within the meaning of the term in the said Act. All that this means is that if there is a termination and that particular unit is not resold but retained by the Appellants, there would be no works contract to that extent. But so long as there is no termination the construction is for and on behalf of purchaser. Therefore, it remains a works contract within the meani .....

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Court that the decision was required to be reconsidered by a larger Bench. The three Judges Bench of the Supreme Court in Larsen & Toubro Ltd's case (supra) upholding the view expressed in K. Raheja Development Corporation's case (supra), summarised the legal position as under:- (i) For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, three conditions must be fulfilled: (one) there must be a works contract, (two) the goods should have .....

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ment, concrete, steel, bricks etc. are intended to be incorporated in the structure and even though they lost their identity as goods but this factor does not prevent them from being goods. (iii) Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. The term works contract in Article 366 (29- A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contra .....

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ubstance of the contract must be seen have lost their significance where transactions are of the nature contemplated in Article 366(29-A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contract. The enforceability te .....

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ks contract. Such a deemed sale has all the incidents of the sale of goods involved in the execution of a works contract where the contract is divisible into one for the sale of goods and the other for supply of labour and services. In other words, the single and indivisible contract, now by Forty-sixth Amendment has been brought on par with a contract containing two separate agreements and States have now power to levy sales tax on the value of the material in the execution of works contract. ( .....

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evy of sales tax. In other words, transfer of movable property in a works contract is deemed to be sale even though it may not be sale within the meaning of the Sale of Goods Act. (xi) Taxing the sale of goods element in a works contract under Article 366(29-A)(b) read with Entry 54 List II is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of immovable property. The value of the goods which can constitute the .....

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on which would be covered under the term works contract . The term works contract encompasses a contract in which one of the parties is obliged to undertake or to execute works. The activity of construction has all the attributes, elements and characteristics of works contract though essentially it may be a transaction of sale of flat. To put it differently, so long as construction is for and on behalf of the purchaser, it remains a works contract under the Act. 30. Further, the essential condit .....

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e will be an element of sale of goods included therein and therefore, building contracts are species of the works contract. Still further, a contract comprising of both a works contract and a transfer of immovable property, such contract is not denuded of its character of being a works contract. Article 366 (29A)(b) of the Constitution of India does contemplate a situation where the goods may not be transferred in the form of goods but may be transferred in some other form which may even be in t .....

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them and the flat purchaser to construct a flat and ultimately to sell the flat with the fraction of land, we proceed to examine the broad principles for determining the taxable turnover relating to transfer of goods involved in the execution of such works contract. Where the developer/builder/promoter/contractor or the sub-contractor maintains proper books of account, it shall be the value of the goods incorporated in the works contract as per books of account. On the other hand, where the deve .....

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f the works contract. The taxable event is the transfer of property in the goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works. 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. The activity of construction undertaken by the developer etc. would be works contract only from t .....

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until the construction was completed, there was no contract for construction of the building with the flat purchaser, the goods used in the construction cannot be deemed to have been sold by the builder since at that time there is no purchaser even if building is intended to be sold after construction would be of no consequence. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government. .....

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ement with the flat purchaser on which the subcontractor has already paid the tax. 32. Next, it was claimed by learned counsel for the petitioners that the State of Uttar Pradesh has framed rule 9 of UPVAT Rules, 2005 and Delhi State under Rule 3 of Delhi VAT Rules, 2005 have introduced specific provisions for charging VAT on transaction of the developers etc. whereas there is no such provision in the rules. The developer who does not carry on construction activities itself but creates sub contr .....

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immovable property. However, the Act and the Rules do not contain inter alia any deduction on account of the following:- (a) Immovable property, and (b) value of all other expenses which are not relatable to the supply of goods such as (1) EDC, (2) IDC (3) change of land use charges (4) charges for sanctioning of maps (5) charges for processing of maps (6) Marketing expenses, etc. (7) finance charges (8) stamp duty (9) legal expenses (10) labour cess (11) scrutiny fee (12) charges for various ap .....

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25(2) of the Rules also provides for deductions on that account alone. It is, therefore, clear that on application of these provisions to a developer etc., the value of immovable property and other expenses incidental thereto which are integral part of the transaction of sale of flat, would not be excluded and the net effect of which would be that rather than being a tax on value of materials transferred, the provisions lead to taxing of value of immovable property and expenses not relateable to .....

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ts/contracts entered by developers with prospective buyers for sale of apartments/ flats before the completion of construction constitutes 'works contract' and thus VAT was imposable on such transactions. Clause 4 of the said circular relates to measure of tax and deduction towards labour and other like charges. Circular dated 4.6.2013 was issued regarding making of assessments on builders and developers. In view of legal position enunciated hereinbefore, there is no illegality in the is .....

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which would result in sustaining the statute. The Constitution Bench of the apex Court in the State of Madhya and others v. M/s Chhotabhai Jethabhai Patel and Co. and another, AIR 1972 SC 971 in para 10 had held as under: "It is settled law that where two constructions of a legislative provision are possible one consistent with the constitutionality of the measure impugned and the other offending the same, the Court will lean towards the first if it be compatible with the object and purpose .....

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which preserves and sustains the validity of the provision. That is to say, courts must, with intelligent imagination, inform themselves of the values of the Constitution and, with functional flexibility, explore the meaning of meanings to adopt that construction which humanely constitutionalizes the statute in question. Plainly stated, we must endeavour to interpret the words in Ss.30 and 56 of the Prisons Act and the paragraphs of the Prison Manual in such manner that while the words belong to .....

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nciple, to be vital, must be capable of wider application than the mischief which gave it birth. This is peculiarly true of constitutions. They are not ephemeral enactments, designed to meet passing occasions. They are, to use the words of Chief Justice Marshall, "designed to approach immortality as nearly as human institutions can approach it". The future is their care and provision for events of good and bad tendencies of which no prophecy can be made. In the application of a constit .....

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d. The meaning and vitality of the Constitution have developed against narrow and restrictive construction." 37. The rule of interpretation requires that such meaning should be assigned to the provision which would make the provision of the Act effective and advance the purpose of the Act. This should be done wherever possible without doing any violence to the language of the provision. A statute has to be read in such a manner so as to do justice to the parties. Moreover, the Apex Court in .....

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ning out creases to make a statute workable. 38. Explanation (i) to Section 2(1)(zg) of the Act which defines sales price provides for deduction on account of labour, material and services related charges from the gross turnover as defined under Section 2(1)(u) of the Act while arriving at the sale price in a works contract. It is not a charging provision which creates any liability for assessing VAT in a works contract . It is in the definition clause of the Act and the provision does not embra .....

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accounts, it shall be on the basis of actual value addition on account of goods utilized in the property. Rule 25(2) of the Rules provides for deduction of charges towards labour, services and other like charges and where they are not ascertainable from the books of accounts maintained by a developer etc., the percentage rates are prescribed in the table provided in the said rule. It is necessarily required to provide mechanism to tax only the value addition made to the goods transferred after t .....

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d Taxation Commissioner, Haryana, wherein paras 3 to 8 read thus:- 3. That it is affirmed that the developers/work contractors, being assessed as normal VAT dealers, are entitled to all deductions admissible as per Law/Rules. 4. That as per the provisions contained in the Haryana VAT Act, 2003 and the rules framed thereunder, the tax is to be levied on transfer of property in goods involved in the execution of works contract. It is clarified that the definition of the word 'goods', as av .....

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ot violate the above constitutional mandate. NON-VAT DEALER (WORKS CONTRACTORS): 8. That there is, however, some difference as regards levy vis-a-vis non-VAT dealer i.e. works contractor operating under composition/lump sum scheme provided under section 9 of the Act and rule 49 of the Rules made thereunder. It is submitted that such works contractors, who opt for the benefit of the scheme aforesaid, are required to pay a lump sum in lieu of tax on the total valuable consideration receivable for .....

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r to exercise this option against his will. He is fully free to exercise his option. If the scheme aforesaid does not suit him, he can very well refrain from the same. The provisions, referred to above, upon application of strict interpretation principle to fiscal statute, leaves no manner of doubt that such a contractor is not entitled to any deduction whatsoever. 41. The assertion in the affidavit in the absence of any specific provision in the statute or the rule would not give it a statutory .....

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n short the MVAT Rules 2005 ) under similar circumstances, had applied the principle of reading down a provision for upholding its constitutional validity. Rule 58 of the MVAT Rules 2005, inter alia, provide for determination of sale price and of purchase price in respect of sale by transfer of property in goods (whether as good or in some other form) involved in the execution of a works contract. Sub rule (1) and (1A) thereof which is relevant, reads thus:- (1) The value of the goods at the tim .....

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tect s fees; (d) charges for obtaining on hire or otherwise, machinery and tools for the execution of the works contract; (e) cost of consumables such as water, electricity, fuel used in the execution of works contract, the property in which is not transferred in the course of execution of the works contract; (f) cost of establishment of the contractor to the extent to which it is relatable to supply of the said labour and services; (g) other similar expenses relatable to the said supply of labo .....

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the Commissioner may in lieu of the deductions as above provide a lump sum deduction as provided in the Table below and determine accordingly the sale price of the goods at the time of the said transfer of property. TABLE Sr. No. Type of works contract Amount to be deducted from the contract price (expressed as a percentage of the contract price (1) (2) (3) Sr. No. Type of works contract Amount to be deducted from the contract price (expressed as a percentage of the contract price 1 to 15 XX XX .....

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e deductions under sub-rule (1) and the cost of the land from the total agreement value. The cost of the land 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 the 1st January of the year in which the agreement to sell the property is registered: XX XX XX. 43. Under sub-rule (1) to Rule 58 of the MVAT Rules, 2005, the State .....

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ons noted hereinbefore. However, sub rule (1A) in Rule 58 of the MVAT Rules, 2005 was inserted therein by a notification dated 01.06.2009. The rule has provided that in the case of construction contracts where the immovable property, land or as the case may be, interest therein is to be conveyed and the property in the goods involved in the execution of the construction contract is also transferred, then it is such transfer of goods alone which is liable to tax. The value of the goods at the tim .....

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sell the property is registered. The rule provides for measure of determination of the tax. It does not create any liability to tax as a charging provision. The Supreme Court in Larsen & Toburo's case (supra) specifically read down Rule 58 which were computational provision whereby exclusion of value of land on the basis of circle rates and ceiling on such deduction had been provided. The Apex Court noticed as follows:- The value of the goods which can constitute the measure of the levy .....

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read down Rule 58(1-A) accordingly. The Maharashtra Government has to bring clarity in Rule 58(1-A) as indicated above. Subject to this, validity of Rule 58(1-A) of the MVAT Rules is sustained. 44. 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. The tax is to be computed on a value not exceeding the value of transfer of pro .....

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ude a residuary clause in consonance with the mandate of law so as to cover all situations which can be envisaged. 45. In view of the above, essentially, the value of immovable property and any other thing done prior to the date of entering of the agreement of sale is to be excluded from the agreement value. The value of goods in a works contract in the case of a developer etc. on the basis of which VAT is levied would be the value of the goods at the time of incorporation in the works even wher .....

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dverting to the issue of challenge to Section 42 of the Act is concerned, according to the learned counsel for the petitioners the assessing VAT liability on the developer when the goods have been transferred by the sub-contractor was in clear contravention of States 's power vide Entry 54 List II of Seventh Schedule. Therefore, the provision wherein the tax was to be assessed in the hands of the developers even where the property was transferred by the sub-contractor was clearly untenable i .....

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ent has become final. This provision only safeguards the interest of the revenue in the event of failure on the part of the sub contractor to discharge his liability of tax in respect of transaction entered by the sub contractor with the contractor. The provision, thus, cannot be said to be arbitrary, discriminatory or unreasonable in any manner. The contention of the learned counsel for the petitioners in this behalf is, thus, repelled. 48. Equally, the challenge to validity of Section 9 of the .....

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ule 49 of the Rules and the circular dated 10.2.2014 provide for determination of the tax under composition scheme which is optional and are not the charging provisions for the levy of VAT. Once a dealer opts for composition scheme which is optional, he gets various advantages and privileges which otherwise are not available to ordinary VAT dealers. In such a situation, in view of the judgment of the Apex Court in Koothattukulam Liguous v. Deputy Commissioner of Sales Tax, (2014) 72 VST 353, the .....

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he proposition that wherever alternative remedies are available, the writ court should be loath in interfering in such matters. However, certain exceptions have been carved out by various judicial pronouncements of the Apex Court and also the High Courts. 51. A Division Bench of this Court in Jindal Strips Limited and another v. State of Haryana and others (1996) 100 STC 45 after considering the various pronouncements of the Apex Court and other High Courts on the subject in extenso, laid down t .....

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ghts of the parties, which by and large depend upon the facts, the High Court should refrain from entertaining and adjudicating upon the rights of the parties, but to this principle, there are certain exceptions and a citizen, who can successfully cover this case in either of the exceptions, cannot be shown the exit door of his entry to the High Court and be compelled to go before the authorities concerned. Some of the exceptions under which a petition may lie under Article 226 of the Constituti .....

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ther exception is when the highest authority under the Act has taken a particular view on a question of law and the said view is known to all the subordinate authorities as also when a different or contrary view has not been expressed by the High Court or the Supreme Court. In such an event, the remedy of appeal or revision would be a remedy popularly known as from cesure to cesure or from pole to pole. Subordinate authorities are bound to follow the view expressed by the highest authority in th .....

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ignitaries in the State and the allegations are not frivolous and on the contrary are shown, prima facie, to be in existence. Yet another exception can be when the alternative remedy is not equally efficacious. Yet another exception can be when the matter is not decided in limine and it is taken after several years for hearing and decided on merits and meanwhile the period of limitation prescribed under the statute for filing an appeal has expired. The exceptions can be multiplied but the court .....

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