The activity of construction is liable to Value Added Tax (“VAT”) on “the transfer of property in goods involved in the execution of a Works contract”, under the extended definition of Sale, pursuant to introduction of Article 366(29A) by the 46th Amendment in the Constitution of India.
This blog considers the issues arising when a person goes and buys a flat or a commercial property from a builder; is it a “Sale”, and can the activity be amenable to a levy of VAT? The controversy emanates from the decision of the Hon’ble Supreme Court in K. Raheja Development Corporation [141 STC 298 (S.C)], wherein, it was held that if the Agreement is entered into after the flat or unit is already constructed, 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.
In the K. Raheja case, the facts were that there were two contracts, one for sale of undivided interest in land and another for construction of the flat after the land sold to the buyer. The decision of the Hon’ble Supreme Court has led to a series of demand notices being issued by the VAT Authorities contending that even in case of an Agreement for Sale of a Flat per se, there is a liability to VAT, as the builder is constructing the property on behalf of the purchaser / buyer.
The charging Section under most of the VAT laws provides for a levy of VAT on every Dealer for Sale of goods. The term “Sale” is defined to mean a Sale of goods made within the State for cash or deferred payment or other valuable consideration …” .The term “goods” is defined to mean “every kind of moveable property….” When a builder buys a flat or any other property from the builder, the Agreement is with respect to a Sale of flat per se, which is an immovable property. The obligation under the Agreement is with respect to sale and purchase of flat and the buyer is nowhere concerned with the fact as to how the builder gets the flat constructed.
The Hon’ble High Court in Assotech Realty Pvt. Ltd. vs. State of UP and Another [Order dated 23.03.2007] held that taking into consideration the terms and conditions of the letter of allotment, the petitioner continues to remain the owner of the apartments/flats including all construction until the sale deed is executed and registered in favour of the prospective allottees/purchasers. The payment of installments by the prospective allottees/purchasers does not transfer any right, title or interest in the construction undertaken by the petitioner. Thus, the construction undertaken by the petitioner cannot be said to have been undertaken by it for and on behalf of the prospective allottees/purchasers. The decision has distinguished the decision of K. Raheja (above) on the ground that in K. Raheja’s case there was a separate contract for construction on the undivided portion of land which was already sold to the buyer.
It would also be pertinent to analyse the issue with the help of an example. Let’s say Builder A is constructing a residential property with 20 Flats. The construction of the property is 3/4th completed and no sale has been made for any of the Flats. It is very clear that the activity of construction is carried out by the builder on his own account. The activity has already resulted in creation of some immovable property. At this stage, say 15 flats are sold to the buyer and the buyer enters into an Agreement of Sale with the builder and pays the relevant stamp duty. The buyer makes payment to the extent of completed construction. Can it be said that in respect of the consideration received, there is a liability to VAT?
It is a settled position in law that in respect of Works Contract, the transfer of property takes place by the theory of accretion i.e. at the time when the goods are incorporated into the Works Contract (See State of Andhra Pradesh & Ors. Vs. Larsen & Tubro & Ors [Civil Appeal No. 5239 of 2008] and Builders Association of India and others vs. Union of India and others [(1989) 73 STC 370]. At the point in time when the goods are being incorporated in the Works Contract, there is no buyer in existence.
The fact that the Agreement is entered into either before or after the flat or unit is already constructed is inconsequential in determining whether the activity can be treated as a Works Contract for the purpose of levying VAT. What is required to be analysed is that whether the Agreement / contractual obligation is for a Sale / purchase of Flat per se or is it for construction of a flat as per a buyer’s requirements and specifications. In cases where the Agreement is clearly for Sale of Flat, it is a Sale of chattel as a chattel and being immovable property, outside the purview of VAT. The latter is however a contract of work and labour and hence, will be liable to VAT. Based on the aforesaid finding, the Hon’ble Supreme Court in Larsen & Tubro vs. State of Karnataka [2008 (12) S.T.R. 257 (S.C.)] has held that the decision in K. Raheja (Supra) requires re-consideration.
Therefore, to the extent there is an attempt to levy VAT on Sale of Flat, an immovable property, that attempt is ultra vires Article 366(29A) and Article 246 (2) of the Constitution of India and may be challenged by way of filing of a Writ petition under Article 226 of the Constitution of India. In fact, Writ Petitions have already been filed challenging the levy of VAT on Sale of flats and it will be interesting to see how many more are filed in the future.
By Sujain Talwar and Ritesh Kanodia