Wednesday, May 20, 2015

Harayana VAT must incorporate provisions to exclude value of land from works contract


Where assessee, a builder/developer, entered into agreements with prospective buyers to construct flats, etc. and thereafter sell same with some portion of land against valuable consideration, activity of assessee would be covered under term 'works contract' but Assessing Authority was to be directed to pass fresh assessment order

Facts :


1)Assessee, a builder/developer, entered into agreements with prospective buyers to construct flats, etc., and thereafter sell same with some portion of land against valuable consideration.

2)Assessing Authority in terms of circulars dated 7-5-2013, 4-6-2013 and 10-2-2014 providing for levy of VAT on builders, etc., levied VAT on transaction of sale of flats, floors and villas effected by assessee.

3)Assessee filed writ petition for declaring provisions which include value of land for charging VAT on developers to be ultra vires the Constitution.

High Court held partly in favour of assessee as under :

a)From a consideration of various decisions of the Supreme Court arising under article 366(29A) of the Constitution, it follows that the agreement between the promoter/builder/developer and the flat purchaser to construct a flat and thereafter sell the flat with some portion of land does involve construction which would be covered under the term 'works contract'.

b)Rule 25 provides for exclusions in respect of labour, services and other like charges and does not provide for any mechanism for exclusion of the value of land. Wherever developer/builder/promoter or the sub-contractor who carries on construction work in a works contract maintains proper accounts, it shall be on the basis of actual value addition on account of goods utilized in the property. Rule 25(2) provides for deduction of charges towards labour, services and like charges and where they are not ascertainable from the books of account maintained by a developer, etc., the percentage rates are prescribed in the table provided in the said rule.

c)It is necessarily required to provide mechanism to tax only the value addition made to the goods transferred after the agreement is entered into with the flat purchaser. The 'deductive method' thereunder does not provide for any deduction which relates to the value of the immovable property. The legislature has not made any express provision in rule 25 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.

d)Essentially the value of immovable property and any other thing done prior to the date of entering into 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 on.

e)Further, VAT is to be directed on the value of the goods at the time of incorporation and it should not purport to tax the transfer of immovable property. Consequently, rule 25(2) is held to be valid, but State Government shall bring necessary changes in the said rule inconsonance with the above observations - CHD Developers Ltd. v. State of Haryana (2015) 57 taxmann.com 315 (Punjab & Haryana).
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