By TIOL News Service

HYDERABAD, JULY 06, 2015: THE issue before the Bench is - Whether land, being immovable property and not falling within definition of goods under Sec 2(16), is liable to tax under Sec 4(7)(a). NO is the answer.

Facts of the case

The assessees are developers of apartment buildings, villas, houses, commercial complexes etc, identify and purchase land suitable for construction. After preparation of lay outs, and after making provision for necessary amenities such as roads, parks, water, electricity, sewerage, health club and other facilities, they construct houses and sell them after obtaining necessary sanctions. It is their case that for operational convenience, and to enable the buyers to raise loans, the respective plots, with a semi-finished structure, are initially sold to buyers with a pre-condition that development would be undertaken only by the assessees in terms of the sanctioned plans for such group housing schemes. In some cases only plots are initially sold, and in some others semi- constructed structures are also sold along with the plot or the undivided share of land. Approval is obtained from the concerned authorities before commencement of construction, and prior to the sale of land. The assessees execute a conveyance in favour of the purchaser, either in respect of the plot of land on which a residential house is to be constructed, or the plot of land with the semi-finished structure. Initially an agreement of sale is entered into, by the developer- dealer with the prospective purchasers, with the pre-condition that the purchasers cannot enter into a contract, with any other third party, for construction of a residential apartment, house, building etc. After execution of the sale deed, another agreement is entered into by the petitioner with the purchaser for completion of construction of the residential apartment, buildings etc in accordance with the approved plans and the original document. Every residential house is predesigned, and is a part of the group housing scheme developed by the developer, and the buyer has no say in the matter. The initial agreement of sale, which the developers enter into with prospective buyers for the sale of apartments, includes the consideration receivable on the sale of a semi-finished apartment, and the cost of construction thereafter. The assessees have all opted to pay tax by way of composition under Section 4(7)(d) and have been paying VAT at 4%/5% of 25% of the total consideration, on these components of the agreements, at the time of registration of the flats or soon thereafter.

In the assessment order (the validity of which is questioned in W.P. No.30173 of 2014), the Assistant Commissioner, CT-III, held that the main contractors had entered into a tri-partite agreement with the land owners and the prospective buyer (customer) for construction of a residential apartment; they had then register the semi-finished apartment in favour of the customer; they had opted for composition under Section 4(7)(d) of the Act; any works contract, executed after registration of a semi-constructed apartment in the name of the customer, is a separate works contract (construction agreement) under the Act and the A.P. VAT Rules, 2005 (Rules for short); the assessee is, therefore, liable to pay tax on the value of the goods at the time of its incorporation in the course of execution of the works contract, (at the rates applicable to the goods under the Act), under Section 4(7)(a) and not under Section 4(7)(d); the assessee has not opted for composition under Section 4(7)(b) for the construction / completion/finishing agreement; they were, therefore, liable to be assessed under Section 4(7)(a); they had only paid 4% of 25% of the entire sale consideration; they had, thereby, under-declared VAT; and the value of the construction agreement was required to be assessed under the regular scheme of taxation i.e the non-composition scheme.

The assessing authority further held that the dealers themselves had admitted that they had executed three types of documents i.e, (1) the agreement of sale, (2) the sale deed for the semi-finished apartment, and (3) the construction agreement; a fresh agreement, for completion of the pending works of the flat, was entered into either with, or after, execution of the sale deed; the construction agreement, entered into after registration of the semi- finished apartment in the name of the customer, is a fresh works contract for which the contractor is required to pay tax at the rates applicable on the value of the goods at the time of incorporation, or under the composition scheme by filing Form VAT 250 before the assessing authority; as the dealer had failed to submit Form-VAT 250 opting to pay tax under Section 4(7)(b), and they had not submitted the details to arrive at the value of the goods at the time of incorporation, tax had been rightly proposed under the proviso to Section 4(7)(a) read with Rule 17(1)(g); in the light of the decision of the advance ruling authority in M/s. Madhu Collections, the transactions relating to incorporation of goods in the works, in the course of execution of a works contract subsequent to registration of the immovable property ie apartments, residential complexes etc., is taxable under Section 4(7)(a) or Section 4(7)(b) of the Act, depending on whether the contractor had opted for composition; the said ruling squarely applied to the case of the assessee-dealer.

The assessment order dated 06.11.2014, (the validity of which is put in issue in W.P. No.37528 of 2014), was passed by the Commercial Tax Officer. In the said order, the assessing authority held that the words construction and selling, as used in Section 4(7)(d), made it clear that the said provision was applicable only to transactions where construction and sale takes place; any construction, that takes place subsequent to sale, does not fall within the ambit of Section 4(7)(d); it would, necessarily, fall under Section 4(7)(a) if the dealer has not opted for composition, or under Section 4(7)(b) if the dealer has opted for composition; incorporation of goods in the course of execution of the works contract, subsequent to registration of the immovable property in the form of apartments, buildings, residential complexes etc, is taxable under Section 4(7)(a) or Section 4(7)(b) of the Act depending upon whether or not the contractor has opted for composition; the objection of the dealer, that all receipts should be taxed under Section 4(7)(d), was liable to be rejected; as the dealer had entered into an agreement of sale, the amounts received/receivable till execution of the sale deed is liable to tax under Section 4(7)(d); and the contract receipts, after execution of the sale deed, i.e., on the construction agreements, were liable to tax under Section 4(7)(a) of the Act.

Having heard the parties, the Court held that,

IS THE POST-SALE COMPLETION/FINISHING WORKS CONTRACT ELIGIBLE FOR COMPOSITION UNDER SECTION 4(7)(d) OF THE AP VAT ACT?

++ the term works contract, as defined in Section 2(45) of the Act, is an inclusive definition. It does not include merely a works contract as normally understood. It is a wide definition which includes any agreement for carrying out building or construction activity for cash, deferred payment or other valuable consideration. The definition does not make a distinction based on who carries on the construction activity. Thus even an owner of the property may be said to be carrying on a works contract if he enters into an agreement to construct, for cash, deferred payment or other valuable consideration, and he would be liable to pay tax on the turnover relating to the transfer of property in the goods involved in such a works contract. (K. Raheja Development Corpn. v. State of Karnataka = 2005-TIOL-77-SC-CT; Larsen & Toubro Ltd. v. State of Karnataka 2013-TIOL-46-SC-CT-LB. The charge to tax, under Section 4(1) of the Act, is on the sale of goods in the State. As noted hereinabove goods are defined, under Section 2(16) of the Act, to mean all kinds of movable property other than those excluded by the definition itself. Labour and services, not being movable property, would not fall within the definition of goods under Section 2(16), and no tax can be levied under the Act for the consideration received in a contract merely for labour and services. Similarly land, being immovable property and not falling within the definition of goods under Section 2(16), is not liable to tax under the Act;

++ Section 4(7) of the VAT Act is the charging provision whereby tax is levied on the goods involved in the execution of works contracts. Tax, under Section 4(7)(a) of the Act, is payable by a dealer if he chooses not to exercise the option of composition under Section 4(7)(b) and (d) of the Act. (M/s. Mark Infrastructure Pvt. Ltd. v. The Commercial Tax Officer 2014-TIOL-2003-HC-AP-VAT. Under clause (a) of Section 4(7) the liability to pay tax, by a dealer executing works contracts, is on the value of the goods at the time of incorporation of such goods in the works executed by him;

++ Even in a composite or an indivisible contract, where books of accounts are maintained by the dealer, his liability to pay tax under Section 4(7)(a) of the Act is only on the deemed sale of goods i.e., the value of the goods incorporated in the works executed by him. Under the proviso to Section 4(7)(a), where accounts are not maintained to determine the correct value of the goods at the time of incorporation, the dealer is liable to pay tax at the rates specified in Schedule-V on the total consideration received or receivable subject to such deductions as may be prescribed. The deductions, prescribed in terms of the proviso to Section 4(7)(a), are those referred to in Rule 17(1)(g) and, thereunder, the standard deduction prescribed for works contracts, involving construction of buildings, is 30%; and the tax payable is 14% on the total consideration received minus the standard deduction. In effect, the dealer is required to pay 14.5% tax on 70% of the total consideration received or receivable on the execution of the works contract relating to construction of buildings;

++ Tax, under Section 4(7)(a), is not levied either on land (which constitutes immovable property) or on the consideration received or receivable towards labour and services (as it does not constitute goods). Even in cases where the dealer does not maintain books of accounts his liability to pay tax, under Section 4(7)(a) and its proviso, is on the total consideration received or receivable less the standard deduction prescribed under Rule 17(1)(g). The standard deduction is prescribed to avoid subjecting to tax the labour and services component of the works executed by a contractor, as tax can only be levied on the deemed sale of goods incorporated in the works. As the net consideration, received or receivable, for execution of the works contract, (total consideration minus the standard deduction), is alone required to be taken into consideration, in determining the tax liability of the dealer, it is evident that tax, under Section 4(7)(a) and its proviso, is not levied on the consideration received for the land component, or on the labour and service component, of the works contract;

++ Unlike the scheme of composition under Section 4(7)(b) which is available to dealers executing all kinds of works contracts, the composition scheme, under Section 4(7)(d), is available at the option of only those class of dealers mentioned therein;

++ Section 4(7) relates to levy of tax on works contracts. While the normal mode of levy of tax, on dealers executing words contracts, is under Section 4(7)(a), clauses (b) and (d) provide for two different schemes of composition. Clauses (a), (b) and (d) of Section 4(7) are in the alternative, and a dealer cannot be subjected to tax on the execution of a works contract partly under one and partly under another clause of Section 4(7). Classification of dealers executing works contracts, under clauses (b) and (d) of Section 4(7), is based on the nature of business the dealer is engaged in, and does not change merely because a conveyance deed is executed and registered for the sale of a semi-finished structure. As long as it is the same contractor who executes the works for the same purchaser, from commencement till completion, the option available to him, to pay tax under clauses (b) and (d) of Section 4(7), would depend on the class and category of contractors to which he belongs, and the nature of the business he is engaged in, and not on the stage of construction when a conveyance deed is executed;

(i) IS THE POST-SALE WORKS CONTRACT DISTINCT AND DIFFERENT FROM THE WORKS CONTRACT EXECUTED PRIOR TO EXECUTION OF THE SALE DEED?

+ Section 4(7)(d) uses the words residential apartments, houses, buildings or commercial complexes. Rule 17(4) relates to treatment of Apartment Builders and Developers under composition. An apartment builder can only be a person who builds a completed apartment and not a semi-finished structure. The words residential apartment, house or commercial complex can only mean a completed building, and not a semi-finished structure. Only those dealers engaged in the construction of a residential apartment, house, building, commercial complex etc from its commencement till its completion, and in the sale of such buildings, are entitled for the benefit of composition under Section 4(7)(d) of the Act. Blacks Law Dictionary - (6th Edition) defines engage to mean to employ or involve ones self; to take part in; to embark on. P.Ramantha Aiyers The Law Lexicon (Reprint edition 2002) defines engaged in business to mean occupied in doing business and engages to mean to take part; to devote attention and effort; to employ ones self; and to conduct. The word engaged, in the context of Section 4(7)(d), can only mean involved in or carrying of business in. The words residential apartments, houses, buildings or commercial complexes as used in Section 4(7)(d), is in the plural and not in the singular. These words, when read in conjunction with the word engaged, can only refer to a developer who carries on business in the construction and sale of a plurality of units. (residential apartments consisting of several flats or commercial complexes comprising several shops). The benefit of composition is available to those carrying on business of construction and sale of the buildings referred to in Section 4(7)(d), and is not based on the vagaries of the stage of sale of the semi-finished structure of one of the units (ie one of the flats in a residential complex or one of the shops in a commercial complex);

++ the entire transaction must be viewed from a commercial and realistic perspective, and must be examined holistically. (Vodafone International Holdings BV v. Union of India 2012-TII-01-SC-LB-INTL. The purchaser of the residential apartment, house/building etc, is the same person with whom the developer enters into the initial agreement, executes a registered deed for the sale of a semi-finished structure, and thereafter enters into a finishing agreement for completion of the semi-finished structure into a residential apartment, house, building etc. The artificial severance of the identity of the person who purchases the residential apartment/flat from a developer, firstly as a prospective buyer before execution of a sale deed, and thereafter as the owner of semi-finished structure, does not find support from a plain and literal construction of Section 4(7)(d). Where the literal reading of a fiscal statute produces an intelligible result, clearly there is no ground for reading in words or changing words according to what may be the supposed intention of the legislature. (R. v. Oakes);

++ the intention of the Legislature in a taxation statute is to be gathered from the language of the provisions, particularly where the language is plain and unambiguous. It is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. If the words are clear, and directly convey the meaning, there is no need for any interpretation. (Collector of Central Excise, Bombay-1 v. M/s. Parle Exports (P) Ltd. 2002-TIOL-401-SC-CX; Mangalore Chemicals and Fertilisers Ltd. v. Deputy Commissioner of Commercial Taxes) 2002-TIOL-234-SC-CX. On a literal interpretation, clauses (a), (b) and (d) of Section 4(7) of the Act do not require the developer to be treated as a dealer falling within the ambit of Section 4(7)(d) prior to execution of a sale deed, and as a contractor falling within the ambit of Section 4(7)(a) or Section 4(7)(b) for the construction made thereafter;

(ii) CAN THE POST-SALE WORKS CONTRACT BE TREATED AS AN INDEPENDENT CONTRACT FOR EXECUTION OF WORKS WITHOUT SALE?

++ In the present batch of Writ Petitions, the registered deed executed for the sale of a semi-finished structure, and the finishing/completion agreement entered into thereafter to make the semi-finished structure a fully built residential apartment fit for occupation, are both integrally connected with the initial agreement entered into between the developer and the prospective buyer, and is not independent thereof. The scope of the work specified in the initial agreement is split into two. While the land component and a portion of the executed work are, ordinarily, reflected in the registered sale deed, the construction still remaining to be completed, in terms of the initial agreement, is specified in the finishing/completion agreement. The finishing agreement forms an integral part of the initial agreement. The total turnover, liable to tax under Section 4(7)(d), is the consideration reflected in the initial agreement which is later split up between the consideration reflected in the sale deed and the consideration receivable as specified in the finishing agreement;

++ a semi-finished structure, not being fit for occupation, cannot be said to be a residential apartment, house or building. The dealer, referred to in Section 4(7)(d), is evidently a person who constructs and sells a completely constructed building in the form of either a residential apartment or a house or a commercial complex, and not one who constructs and sells a semi- finished structure;

++ the liability of the dealer, to pay tax by way of composition under Section 4(7)(d) of the Act, is on the total consideration received, towards the composite value of the land and building, from the commencement of construction of the residential apartment, house, building etc., till its completion, and not merely on the consideration received for the construction of a semi-finished structure.

(iii) DOES THE WORKS CONTRACT, EXECUTED PRIOR TO SALE, ALONE FALL WITHIN THE AMBIT OF SECTION 4(7)(d)?

+ The entire construction, as specified in the initial agreement entered into between the developer and the prospective buyer, would fall within the ambit of Section 4(7)(d), and not merely that part of the construction undertaken prior to execution of a registered sale deed for a semi-finished structure. The residential apartments, houses, buildings and commercial complexes, referred to in Section 4(7)(d), can only mean fully constructed apartments, houses, buildings or commercial complexes, and not a semi-finished structure. The submission urged on behalf of the revenue that the benefit of composition, under Section 4(7)(d), is confined only to those dealers who first construct and then sell residential apartments, and not to those who commence construction, execute a registered deed for the sale of a semi-finished structure, and thereafter complete construction of the residential apartment, is not tenable;

(iv) IS THE CONSIDERATION FOR THE FINISHING WORKS NOT REFERABLE TO THE AGREEMENT OF SALE?

+ even if the dealer has not received the entire consideration, and a part thereof is still due, he is nonetheless required to pay tax on the total consideration, (in terms of the initial agreement between the developer and the prospective buyer), at the time of registration of the sale of the semi-finished structure. The taxable turnover, under Section 4(7)(d), is the entire consideration, agreed upon between the developer and the prospective buyer in the initial agreement, for the value of the land and the completely constructed building. The tax, so computed, must be paid to the Sub-Registrar at the time of registration of the conveyance deed for the sale of the semi-finished structure. The VAT payable, at the time of registration of the sale deed conveying land and the semi-finished structure, would include the VAT payable on the consideration reflected in the sale deed plus the tax payable on the consideration receivable for the remaining construction to make the semi-finished structure a fully complete residential apartment/house;

++ VAT, at the rate prescribed in Section 4(7)(d), must be paid on the entire consideration, and not merely on the consideration reflected in the registered sale deed, to the Sub-Registrar at the time of registration or, in the very same month, along with the tax return, to the assessing authority. The entire tax liability is required to be discharged in the month in which the sale of a semi-finished structure is concluded and registered, and tax should be paid, at that stage itself, for the total consideration received or receivable for the land and buildings which would include the consideration which the developer has not yet received for the post-sale construction to be undertaken by him. The consideration still due, as referred to in the finishing/completion agreement, is the consideration stipulated in the initial agreement minus the consideration already received and reflected in the registered sale deed;

++ any construction made beyond the scope of the initial agreement would, however, be an independent works contract not falling within the ambit of Section 4(7)(d) of the Act. Counsel, appearing on behalf of the assessees, would fairly state that the works executed beyond or independent of the initial agreement, entered into by the developer with the prospective buyer, would not fall within the ambit of Section 4(7)(d) of the Act; and, on such works contracts, the dealer would be liable to pay tax under Section 4(7)(a) of the Act and its proviso;

III. DISTINCTION MADE, UNDER THE APGST ACT, BETWEEN THE COMPOSITION SCHEME FOR GENERAL WORKS CONTRACTS, AND WORKS CONTRACTS OF CONSTRUCTION OF APARTMENTS AND RESIDENTIAL BUILDINGS:

++ A statute is not to be taken as effecting a fundamental alteration in the general law unless it uses words that point unmistakably to that conclusion. (National Assistance Board v. Wilkinson (1952) 2 ALL ER 255 ; Byram Pestonji Gariwala v. Union Bank of India (1992) 1 SCC 31; Central Bank of India v. State of Kerala (2009) 4 SCC 94). In the absence of any context indicating a contrary intention, it may be presumed that the Legislature intended to attach the same meaning to the same words when used in a subsequent statute in a similar connection. (Lennon v. Gibson & Howes Ltd. (1919) A.C. 709). The distinction made by the APGST Act, between contractors who execute all kinds of works contracts and those who construct apartments and buildings, has been continued under the AP VAT Act also. While different rates of tax were prescribed under the APGST Act for general works contracts, and works contracts relating to apartments and buildings, this distinction is made under the A.P. VAT Act also. The legislative intent of both the enactments is to extend the benefit of a distinct scheme of composition to a particular class of contractors executing works contracts of residential apartments and buildings, and not to make the benefit contingent on the stage of construction when a registered sale deed is executed for the conveyance of a semi-finished structure;

Conclusion:

+ If dealers engaged in the construction and sale of residential apartments, houses, buildings or commercial complexes exercise the option, and comply with the conditions stipulated in Section 4(7)(d) and Rule 17(4), they cannot be denied the benefit of composition thereunder for the construction made by them, for the very same person, after execution of a registered deed for the sale of a semi- finished structure. Denial of the benefits of the composition scheme under Section 4(7)(d) to such dealers, for the post-sale construction made in terms of the initial agreement, is illegal and is contrary to the provisions of the AP VAT Act and the Rules made thereunder. The impugned assessment orders must therefore be, and are accordingly, set aside. The assessing authorities shall, in the light of what has been held hereinabove, re-examine the matter and, after giving the assessees a reasonable opportunity of being heard, pass orders afresh in accordance with law.

(See 2015-TIOL-1538-HC-AP-VAT)