TIOL-DDT 2199
27.09.2013
Friday

AFTER all, the term "works contract" is nothing but a contract in which one of the parties is obliged to undertake or to execute works - Supreme Court

IN a landmark judgement in Raheja Development Corporation Vs. State of Karnataka reported in 2005-TIOL-77-SC-CT, the Supreme Court had held that the activities undertaken by builders for construction of flat/building for or on behalf of the prospective customers for consideration in cash or deferred payment is covered under the works contract and not under sale.

In the Raheja case, Raheja after entering into development agreement with the landowners the residential apartments were constructed on obtaining plan approvals. Before construction of residential apartments, agreements were entered into with prospective buyers. The agreements provide for giving undivided land share, construction of residential apartment, provision for car parking in the ground floor etc,.

The Court held this to be a works contract liable to pay tax under the Karnataka Act.

In Larsen & Toubro Limited & Anr Vs State of Karnataka & Anr - 2008-TIOL-186-SC-CT, Supreme Court doubted the correctness of the judgement of the Court in Raheja Development Corporation and felt the decision needs re-consideration by a larger Bench.

The Larger Bench gave its decision yesterday in a marathon judgement running into 85 pages, approving Raheja and holding that it lays down the correct legal position.

The Larger Bench summarised the legal position, as:

(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 been involved in the execution of a works contract and (three) the property in those goods must be transferred to a third party either as goods or in some other form.

(ii) For the purposes of Article 366(29-A)(b), in a building contract or any contract to do construction, if the developer has received or is entitled to receive valuable consideration, the above three things are fully met. It is so because in the performance of a contract for construction of building, the goods (chattels) like cement, 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 contract to provide for labour and services alone. Nothing in Article 366(29-A)(b) limits the term "works contract".

(iv) Building contracts are species of the works contract.

(v) A contract may involve both a contract of work and labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and contract for work (or service) is virtually diminished.

(vi) The dominant nature test has no application and the traditional decisions which have held that the substance 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 test is also not determinative.

(vii) A transfer of property in goods under clause 29-A(b) of Article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made.

(viii) Even in a single and indivisible works contract, by virtue of the legal fiction introduced by Article 366(29-A)(b), there is a deemed sale of goods which are involved in the execution of the works 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.

(ix) The expression "tax on the sale or purchase of goods" in Entry 54 in List 11 of Seventh Schedule when read with the definition clause 29-A of Article 366 includes a tax on the transfer of property in goods whether as goods or in the form other than goods involved in the execution of works contract.

(x) Article 366(29-A)(b) serves to bring transactions where essential ingredients of 'sale' defined in the Sale of Goods Act, 1930 are absent within the ambit of sale or purchase for the purposes of levy 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 11 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 measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat purchaser after incorporation of goods.

We bring you this judgement today. Please see Breaking News

Though this is a case relating to Sales Tax/VAT/Turnover Tax/WCT, it had its ripples in Service Tax.

In early 2006, the then DG, Service Tax tried to make the Raheja judgement applicable to Service Tax and since then, this has been haunting Service Tax and to this day disputes are continuing unabated. Please see DDT 309-23 02 2006.

Audit Report can be filed manually - CBDT

CBDT has issued an order under Section 119 of the Income Tax Act that assesses, who are presently finding it difficult to upload the prescribed Reports of Audit as prescribed under the proviso to sub-rule (2) of Rule 12 of the IT Rules for the Assessment Year 2013-14 in the system electronically may also furnish the same manually before the jurisdictional Assessing Officer within the prescribed due date. However the Report of Audit should be furnished electronically on or before 31.10.2013.

In a related Press Note, the CBDT clarified,

"It has come to the notice of the Central Board of Direct Taxes (CBDT) that many assessees who are required to file their income tax returns by September 30, 2013 are finding it difficult to upload the report of Audit electronically as prescribed under the proviso to sub-rule (2) of Rule 12 of the IT Rules for the Assessment Year 2013-14. Therefore, the CBDT has decided to extend the time for furnishing the report of Audit electronically till October 31, 2013. However, the assessees are required to file the report of Audit manually with the jurisdictional Assessing Officer by the prescribed due date, i.e. September 30, 2013. The assessees are also required to file their returns of income electronically by the prescribed due date, i.e. September 30, 2013."

CBDT Order in F.No. 225/117/2013/ITA.II, Dated: September 26, 2013

CBDT Notifies GAAR - effective April 2016

CBDT has amended the Income Tax Rules to bring in the General Anti Avoidance Rule with effect from 1st April 2016. The Rules also specify the categories to which the GAAR do not apply. Anyway April 2016 is too far away.

CBDT Notification No.75/2013, Dated: September 23, 2013

ITD wants Ombudsmen

GOVERNMENT is to select Income Tax Ombudsmen in Mumbai, Hyderabad, Ahmedabad, Lucknow and New Delhi. Eligible Chief Commissioners may apply before 7th October 2013.

MoF Department of Revenue D.O. F.No.A-12026/6/2013-Ad.1, Dated: September 17 2013

DOPT releases Handbook for Inquiry Officers and Disciplinary Authorities

IN pursuance of the recommendations of the Committee of Experts which was set up to review the procedure of Disciplinary/Vigilance Inquiries, the Department of Personnel and Training (DOPT) had directed the Institute of Secretariat Training and Management to bring out an updated Handbook for Inquiry Officers and Disciplinary Authorities.

And the Institute has brought out the Handbook yesterday.

Customs catches big smuggler - CBI catches Customs

LAST week the Cochin Airport Customs made a huge seizure of 20 kgs of gold valued at Rs. 5.8 Crores from two burka clad lady passengers who arrived from Dubai. These ladies were perhaps only carriers and Customs wanted the kingpin and they arrested one Fayaz and it seems he was too big a personality with friends in the right and high places which went right up to the peshi of the Kerala Chief Minister. The Kerala news media is full of Fayaz and his friends. And now enters CBI. It seems they have registered cases against three Customs officers including a Deputy Commissioner in this connection.

Addressing the Chief Commissioners' Conference a few years ago, the Finance Minister Chidambaram said, " Under a thana (police station), no crime can take place without the knowledge or connivance of at least one officer."

ACES Responds

WE got a pleasant letter from V. Srinivas, Asst Director, DG Systems, Chennai,

With reference to your news item "ACES Woes" in TIOL DDT 2193 on 19.9.2013, the officers from Directorate of Systems Chennai has contacted Mr xxx and clarified the issues raised by them. It was confirmed by them that they have successfully filed all the returns for the return period Oct 2012- Mar 2013. This is for your information. Thanks for raising the issues that comes to your notice, and enabling us to guide the assesses in filing their returns.

The Netizen who reported the issues also wrote to us, “we feel grateful to intimate you that positive response has been received from the Directorate of Systems.”

Thank you Systems - this is how a real Government Servant should work.

CBI Case against Lawyer for giving legal opinion - HC frowns

"CBI's reach exceeds its grasp; The CBI's case against Mrs. Nair is riddled with more holes than a colander.”: HC

A lady lawyer had been charged with cheating and forgery by CBI in relation to a legal opinion she gave on some documents pertaining to a housing loan.

The 60 year old lady lawyer approached the Bombay High Court against the CBI case and the High Court came down heavily on CBI. The Court observed,

"No material discloses the commission of any offence by her. To the contrary: the allegations against her are both absurd and inherently improbable. There is no ground whatever for proceeding against her.

Unless we find that there is at least a prima-facie case against an advocate who gave an opinion - a ‘best judgment assessment', as it were, based on her knowledge of the law, her appreciation of the facts and her reading of the documents - that he played an active role in the fraud alleged, we cannot but conclude that there is no case to be made out against that advocate."

The Court believed that this is a fit case for the award of costs against the CBI and in favour of the Petitioner, and that these costs should not be illusory.

The High Court noted, “For three long years, the Petitioner has had her till then unsullied professional reputation besmirched, and for no good reason. That they have done so is plain. It stares us in the face. For no fault of her own, the Petitioner has lost a client (perhaps all to the good, given the Indian Bank's equally deplorable conduct). But she has also had to suffer the slings and arrows of a truly outrageous fortune at the hands of the CBI.”

Though the Court did not impose costs, it warned the CBI that if another such case comes before it, " the CBI will not find us quite so accommodating.”

DDT Cartoon

Jurisprudentiol – Monday's cases

Customs

Conversion of Free Shipping Bill into DEEC Bills - amendment can be permitted on basis of documentary evidence available at time of clearance - Conversion not allowed: CESTAT

THE appellant made a request for conversion of free shipping bills into DEEC Bills in view of the fact that they had imported components duty free for using in their manufacture of export goods and while filing ARE-2/shipping bills, they had failed to mention these facts in the relevant documents. The request has been rejected by the Commissioner and so the appellant is before the Tribunal.

Income Tax

Whether when assessee transfers its running business and obtains Right of First Refusal to start new business, compensation received from purchaser for breach of such a right is in nature of capital receipt - YES: ITAT

THE Parle Group of companies were engaged in the business of manufacturing, bottling and distribution of soft drinks and beverages under several popular brands viz., Thumbs Up, Limca, Gold Spot, Maaza, Citra, etc., and other popular brands. The Parle Group of companies entered into a “master agreement” with The Coca Cola Co. of U.S.A. (“TCCC”) on September 1993, for transfer of intellectual property rights in the nature of trade marks, knowhow, franchisee rights, etc., in respect of various brands of beverages / soft drinks owned by Parle Group.

The issue before the Bench is - Whether when the assessee transfers its running business and obtains Right of First Refusal to start a new business, compensation received from the purchaser for breach of such a right is in the nature of capital receipt. YES is the Tribunal's answer.

Service Tax

CENVAT - Whether credit is available on Inputs and Capital goods used for Constructing of Mall by contractor which Mall, shops therein, are rented out by appellant and appellant paying service tax under category of “Renting of Immovable Property” - Pre-deposit ordered of 35% of the Credit involved: CESTAT by Majority

THE appellants are owners of shopping malls which consist of various shops. As the said shops are being given on rent by them, they are registered with the Service Tax department as a service provider falling under the category of "renting of immovable property services", along with 'maintenance and repair services' and 'sale of space or time for advertisement services'.

The dispute in the present appeals relates to the CENVAT credit availed by the appellants and utilised for providing output services of 'renting of immovable property services'.

See our Columns Monday for the judgements

Until Monday with more DDT

Have a nice weekend.

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