M-S. LARSEN & TOUBRO LIMITED & ANR. v. STATE OF KARNATAKA & ANR

Citation: [2013] 17 S.C.R. 678

Court: Supreme Court of India

Bench: RAJENDRA MAL LODHA, JASTI CHELAMESWAR, MADAN B. LOKUR

Case summary

M-S. LARSEN & TOUBRO LIMITED & ANR. v. STATE OF KARNATAKA & ANR.pdf

Judgment text

[2013) 17 S. C. R. 678 M/S. LARSEN & TOUBRO LIMITED & ANR. v. STATE OF KARNATAKA & ANR. (Civn Appeal No. 8672 of 2013) SEP,TEMBER 26, 2013 [R. M. LODHA, J. CHELAMESWAR AND MADAN B. LOKUR, JJ. ] Worl<s contract - Concept and meaning of - Held: The term "works contract" in Art. 366 (29-A)(b) takes within its fold all genre of worl<s contract and is not restricted to one specie of contract to provide for labour and services alone - Nothing in Art. 366(29-A)(b) limits the term "worl<s contract" - Where a contract comprises of both a worl<s contract and a transfer of immovable property, such contract does not denude it of its character as worl<s contract - Constitution of India, 1950 - Art. 366(29-A)(b).

Worl<s contract - Levy of tax on goods deemed to have been sold in execution of a works contract - Three conditions to be fulfilled - Held: The conditions are: a) there must be a works contract, b) the goods should have been involved in the execution of a works contract and c) the property in those goods must be transferred to a third party either as goods or in some other form - In a building contract or any contract to do construction, the above three things are fully met. Works contract - Building contract - Held: Building contracts are species of the works contract - 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 - The value of the goods which can constitute the measure for the levy of the tax has to be the KARNATAKA value of the goods at the time of incorporation of the goods Ain works even though property passes as between the developer and the flat purchaser after incorporation of goods - If the developer has undertaken to build for the prospective purchaser for cash or deferred payment or a valuable consideration pursuant to a.

contract then to that extent, the contract is works contract and there is deemed S<J/e ofmaterial (goods) used in the construction of building and merely because the builder has a right of lien in the event due monies are not paid does not alter the character of contract being works contract -However, activity of construction cundertaken by the developer would be works contract only from the stage the developer 'enters into a contract with the flat purchaser - 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 9 Government- Constitution of India, 1950 - Art. 366(29-A)(b).

Works contract - Composite contract - Held: 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 - The dominant nature test has ncJ application) - 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 a/so not determinative. Constitution of India, 1950- Art. 366(29-A)(b) rlw Entry 54 List II of Seventh Schedule - Taxing the sale of goods.

element in a works contract - When permissible - Held: It 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 - Works contract. Constitution of India, 1950 - Art. 366(29-A)(b) rlw Entry 54 List II of Seventh Schedule - Expression "tax on the sale or purchase of goods" - Meaning of - Held: It 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 - Works contract. Constitution of India, 1950 - Art. 366(29~A)(b) - Object of - Held: Is. to bring transactions where essential ingredients of 'sale' defined in the Sale '6f Goods Act, 1930 are absent within the ambit of sale or purchase for the purposes of levy of sales tax - 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 - Sale of Goods Act, 1930 - Works contract. Constitution of India, 1950- Art. 366(29-A)(b) - Transfer of property - Legal fiction - Held: Transfer of property in goods u/clause 29-A(b) of Art. 366 is deemed to be a sale of the goods involved in the execution of a works contract by the p~rson making the transfer and the purchase of those goods , by the person to whom such transfer is made - Even in a single and indivisible works contract, by virtue of the legal fiction introduced by Art. 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 goqds involved in the execution of a works contract where the r;ontract is divisible into one for the sale of goods and the other for supply ·Of labour and services - Works contract. Maharashtra Value Added Tax Act, 2002 - s.

2(24), explanation (b)(ii) - Expression "sale" in - Amended definition of - Held: Is constitutionally valid. Maharashtra Value Added Tax Rules, 2005 - r. 58(1A) - Valuation of goods - Mode of - State Government to bring KARNATAKA clarity in r. 58(1-A) - Subject to this, validity of r. 58(1-A) sustained. The instant two sets of appeals - one from Karnataka and the other ;from- Maharashtra, related to the concept , of works contract and distinction between it and a contract of sale. In regard to the appeals from Karnataka, the leading case related to Larsen & Toubro (L&T). L&T was engaged in property development alongwith owners of vacant land sites in Bangalore for construction of a multistoreyed apartment complex. Accordingly, it entered into agreements of sale with intende~ purchasers, which provided that on the completion of construction, the apartments would be handed over to the purchasers who will also get an undivided Interest in the land.

The revenue authorities concerned issued provisional assessment orders under the Karnataka Sales Tax Act, 1957 and alongwith it also issued demand notices against L & T · on the g'round that it was li~ble to pay tax for development of. projects by it. L & T filed writ petition before the Karnataka High Court opposing the demand . on ground that the· development agreement was not a works contract. The Single -Judge of the High Court noted that the ·controversy raise«i-by, the L&T was covered by the · decision of the Supreme Court in Raheja Development Corporation case, and, accordingly, dismissed the writ petition holding that as L & T' had entered into an agreement to carry out construction activity on behalf of someone else for cash or . for·deferred pay. ment or for. any · o~her valuable construction, it was carrying out works contract. and therefore became liable to pay turnover tax on the transfer of goods involyed in such work. contracts.

The Division Bench of the High Court concurred with the Single Judge and dismissed the writ ·appeal. ·· In order to consider the question whether the view taken in Raheja Development case with reference to definition of "works contract" in Karnataka Sales Tax·Act, 1957 was legally justified, the matter was referred for consideration by the present Larger Bench. The question for consideration before this Court was whether taxing sale of goods in an agreement for sale of flat which is to be constructed by the developer/ promoter is permissible under the Constitution. In the other set of appeals arising from the judgment of the Bombay High Court, challenge was laid to the constitutional validity of Section 2(24) of the Maharashtra Value Added Tax Act, 2002 ("MVAT Act") as amended 1 initially by Maharashtra Act XXXll of 2006 and thereafter by Maharashtra Act XXV of 2007 and Rule 58(1A) of the Maharashtra Value Added Tax Rules, 2005 ("MVAT Rules").

Answering the Reference and sending the matters back to the Regular Bench for final disposal, the Court HELD:1. 1. When the agreement between the promoter/developer and the flat purchaser is to construct flat and eventually sell the flat with the fraction of land, such transaction involves the activity of construction inasmuch as it is only when the flat is constructed then it can be conveyed. Therefore, there is no reason why such activity of construction is not covered by the term "works contract". 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. Such activity of construction has all the characteristics or elements of works contract. The ultimate transaction between the parties may be sale of flat but it cannot be said that the characteristics of works contract are not involved in that transaction.

When the transaction involves the activity of construction, the factors such as, the flat purchaser has MIS. LARSEN & TOUBRO LIMITED v. STATE OF 683 KARNATAKA no control over the type and standard of the material to be used in the construction of building or he does not get any right to monitor or supervise the construction activity or he has no say in the designing or lay-out of the building, are not of much significance and in any case these factors do not detract the contract being works contract insofar as construction part is concerned. [Para 93] [740-D-G] 1. 2. 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: (i) there must be a works contract, (ii) the goods should have been involved in the execution of a works contract, and (iii) the property in those goods must be transferred to a third party either as goods or in some other form.

In a building contract or any contract to do construction, the above three things are fully met. In a contract to build a flat there will necessarily be a sale of goods element. Works contracts also include building contracts. and therefore without any fear of contradiction it can be stated that building contracts are species of the works contract. [Para 94] [740-H; 741-A-B] 1. 3. Ordinarily in the case of a works contract the property in the goods used in the construction of the building passes to the owner of the land on which the building is constructed when the goods and materials used are incorporated in the building. But there may be contract to the contrary or a statute may provide otherwise. Therefore, it cannot be said to be an absolute proposition in law that the ownership of the goods must pass by way of accretion or exertion to the owner of the immovable property to which they are affixed or upon which the building is built. [Para 95] [741-C-E] 1. 4.

Value addition as a concept after Forty-sixth Amendment to the Constitution has been accepted by this Court in P. N. C. Construction case. While dealing with this concept, the Court said that value addition was important concept which had arisen after the Forty-sixth Amendment by insertion of sub-clause (b) of clause (29- A) in Article 366. It has now become possible for the States to levy sales tax on the value of the goods involved in a works contract in the same way in which the sales tax was leviable on the price of the goods in a building contract. On account of the Forty-sixth Amendment in the Constitution, the State Governments are empowered ·to levy sales tax on the contract value which earlier was not possible. [Para 96] [741-E-G] 1. 5. 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. Article 366(29.

·A)(b) 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 the form of immovable property. [Para 97] [741-H; 742-A-B] 1. 6. The State legislatures lack legislative power to levy tax on the transfer of immovable property under Entry 54 of List II of the Seventh Schedule. However, the States do have competence to levy sal~s tax on the sale of goods in an agreement of sale of flat which also has a component of a deemed sale of goods. Aspects theory though does not allow the State legislature to entrench upon the Union List and tax services by including the cost of such service in the value of goods but that does not detract the State to tax the sale of goods element involved in the execution ofworks·contract in a composite contract like contract for construction of building and sale of a flat therein. [Para 100] [743-F-H; 744-A] 1. 7. The legal position is summarised as follows: MIS.

LARSEN & TOUBRO LIMITED v. STATE OF 685 KARNATAKA (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 0 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 prov!. de for labour and services alone. Nothing in Article 366(29-A)(b) limits the term "works contract". (iv) ·· Building contract!? 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 ofgoods and contract for work (or service) is virtually d. iminished. (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 p. roperty 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 0 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 II 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 II is permissible even after incorporation of goods provided KARNATAKA 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. [Para 101) [744- E-H; 745-A-H; 745-A-H; 746-A-G] 1. 8.

The argument on behalf of the developers that the flat purchaser is entitled to transfer of flat and conveyance of fraction of land only when all installments have been fully paid and that shows that the agreement between the developer and the flat purchaser is the sale of flat and not to appoint the developer as the contractor of the flat purchaser for the purposes of carrying out the construction of the flat for and on behalf of the flat purchaser has no merit. The submissiq,n overlooks the typical nature of the development agreement which is followed by a tripartite agreement between the owner of the land, the developer and the flat purchaser. Effectively and de facto it is the developer who constructs the building for the flat purchaser. The developer does so for monetary consideration. The label of payment is not decisive but the factum of the payment is. The construction is done on payment of price as agreed upon between the developer and the flat purchaser.

It is, thus, not correct to say that the work is undertaken by the developer for himself and for the owner and the construction is not carried for and on behalf of the purchaser. [Para 110] [749-G-H; 750-A-C, G] 1. 9. In the development agreement between the owner of the land and the developer, direct monetary consideration may not be involved but such agreement cannot be seen in isolation to the terms contained therein and following development agreement, the agreement in the nature of the tripartite agreement between the owner · of the land, the developer and the flat purchaser whereunder the developer has undertaken to construct for the flat purchaser for monetary consideration. Seen thus, there is nothing wrong if the transaction is treated as a composite contract comprising of both a works contract and a transfer of immovable property and levy sales tax on the value of the material involved in execution of the works contract.

The observation in the referral order that if the ratio in Raheja Development is to be accepted then there would be no difference between works contract and a contract for sale of chattel as chattel overlooks the legal position. [Para 111) [750-G-H; 751-A-C] 1. 10. The argument that flat is to be sold as a flat and not an aggregate of its component parts is already negated by the Constitution Bench in the case of Builders' . Association. Further, if the developer has undertaken to build for the prospective purchaser for cash or deferred payment or a valuable consideration pursuant to a contract then to that extent, the contract is works contract and there is deemed sale of material (goods) used in the construction of building and merely because the builder has a right of lien in the event due monies a. re not paid does not alter the character of contract being works contract. [Paras 112 and 113) [751- D; 752-G-H; 753-A] 1. 11. In Article 366(29-A)(b), the term. 'works contract' .

covers all genre of works contract and it is not limited to one specie of.. the contract. In Raheja Development, the definition of "works contract" in KST Act was under consideration. The Court held that develo-per had undertaken to build for the flat purchaser and so long as there was no termination of the contract, the construction is for and on behalf of the purchaser and it remains a "works contract". The view taken by the two Judge MIS. LARSEN & TOUBRO LIMITED v. STATE OF 689 KARNATAKA Bench in Raheja Development is justified. [Para 114) [752- B, D-E] 1. 12. It may, however, be clarified that activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser. 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. [Para 115) [753-F-G] 1. 13.

The submission that the view in Raheja Development that when a completed building is sold, there is no work contract and, therefore, no liability to tax is not correct statement of law, does not appeal. If at the time of construction and 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. That the building is intended for sale ultimately after construction does not make any difference. [Para 117) [753-B-C] K. Raheja Development Corporation v. State of Kamataka (2005) 5 SCC 162: 2005 (3) SCR 1210 - affirmed. Builders' Association of India and others v. Union of India and others (1989) 2 SCC 645: 1989 (2) SCR 320 - followed. Rainbow Colour Lab Rainbow Colour Lab &Anr. v. State of M. P. & Ors. (2000) 2 SCC 385: 2000 (1) SCR 594 - stood overruled. State of Madras v. Gannon Dunkerley and Co.

(1959) SCR 379 - held impliedly undone. Mis. Larsen & Toubro Limited & Anr v. State of Karnataka & Anr. 2008 (17) SCC 199; Bharat Sanchar Nigam Limited and another v. Union of India and others (2006) 3 sec 1: 2006 (2) SCR 823; The Assistant Sales Tax Officer and Others v. B. C. Kame, Proprietor Kame Photo Studi (1977) 1 SCC 634: 1977 (2) SCR 435; Hindustan Shipyard Ltd. v. State of A. P. (2000) 6 SCC 579: 2000 ( 1 ) Suppl. SCR 592; Nahalchand La/oochand Private Limited v. Panchali Cooperative Housing Society Limited; (2010) 9 SCC 536: 2010 (10) SCR 804; Commissioner of Sales Tax, M. P. v. Purshottam Premji 1970 26 S. T. C. 38; State of Andhra Pradesh & Ors. v. Larsen & Toubro Ltd. & Ors. (2008) 9 SCC 191: 2008 (12) SCR 843; Mis. Gannon Dunkerley & Co. and others v. State of Rajasthan and Others (1993) 1 SCC 364: 1992 (3) Suppl. SCR 103; Keshav Mills Co. Ltd. v. Commissioner of Income Tax, Bombay North, Ahmedabad AIR 1965 SC 1636: 1965 SCR 908; Dewan Joynal Abedin v.

Abqul Wazed (1988) Supp SCC 580; Kartar Singh Bhadana v. Hari Singh Na/wa & Of$ (2001) 4 SCC 661: 2001 (2) SCR 790; Associated Cement Companies Ltd. v. Commissioner of Customs; (2001) 4 SCC 593: 2001 (1) SCR 608; State of U. P. &Ors. v. P. N. C. Construction Co. Ltd. & Ors. (2007) 7 sec 320: 2001 (8) SCR 927; M. R. Hornibrook (Pty. ) Ltd. v. The Federal Commissioner of Taxation (1939) 62 C. L. R. 272; Federation of Hotel & Restaurant Association of India, etc. v. Union of India & Ors. (1989) 3 SCC 634: 1989 (2) SCR 918; State of Andhra Pradesh & Ors. v. Larsen & Toubro Ltd. & Ors. (2008) 9 SCC 191: 2008 (12) SCR 843; Radha Raman v. State of Uttar Pradesh & Ors. AIR 1954 All 700; Lee v. Griffin (1861) 1 B. & S. 272; Robinson v. Graves; (1935) 1 KB 579; Chandra Bhan Gosain v. State of Orissa and Others; (1964) 2 SCR 879; The State of Punjab v. Mis. Associated Hotels of India Ltd. (1972) 1 SCC 472: 1972 (2) SCR 937; Hindustan Aeronautics Ltd. v.

State of Karnataka (1984) 1 SCC 706: 1984 (2) SCR 248; State of A. P. v. Kone Elevators (India) Ltd. ; (2005) 3 SCC 389: 2005 (2) SCR 152; State of Gujarat (Commissioner of Sales Tax, Ahmedabad) v. Mis. Variety Body Builders; (1976) 3 SCC 500: 1976 (0) Suppl. SCR 131 - referred to. MIS. LARSEN & TOUBRO LIMITED v. STATE OF 691 KARNATAKA Hudson's 'Building Engineering Contracts', Eleventh edition, Volume 1; Halsbury's Laws of England, Fourth Edition, Volume 41, para 603; Benjamin's Sale of Goods, Fourth Edition, Para 1. 042 and Pollock and Mulla on Sale of Goods [1990, Fifth Edition, Page 53] - referred to. 8 2. 1. There is challenge to the constitutional validity of explanation (b){ii) to Si! ction 2(24) which was brought by amendment with effect from 20. 06. 2006 in MVAT Act and sub-rule (1A) which was inserted into Rule 58 of the MVAT Rules by a notification dated 01. 06. 2009.

There is no doubt that the amendment in explanation b(ii) to Sectipn 2(24) was brought because of the judgment of this Court in Raheja Development. Since Raheja Dev,elopment lays down the correct legal position, thus, there is no merit in the challenge to the constitutional validity to the provisions of explanation (b)(ii) to Section 2(24) of MVAT which were amended with effect from 20. 06. 2006. The provision under challenge was not in breach of any constitutional boundaries. [Paras 119, 121] [753-E; 754-C-E] ·2. 2. Sub-rule . (1A) was inserted into Rule 58 by a notification dated 01. 06. 2009. As a matter of fact, Rule 58(1) of the MVAT Rules provides that the value of the goods at the time of the transfer of the property in goods involved in the execution of a works contract may be determined by effecting certain deductions from the value of the entire contract insofar as the amounts relating to deductions pertain to the said works contract.

The value of the goods which can constitute the measure of the levy of the tax has to be the value of the goods at the time of incorporation of goods in the works even though property·in goods passes later. Taxing the sale of goods element in a works contract is permissible even after incorporation of goods provided tax is directed to the value of goods at the time of incorporation and does not: I · purport to tax the transfer of immovable property. The mode of valuation of goods provided in Rule 58(1A) has to be read in the manner that meets this criteria and it is read down 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 MVAT Rules is sustained. tParas 123, 124) [756-B-C; 757-G-H; 758-A-B] Case Law Reference: 2005 (3) SCR 1210 affirm.

ed Para 2 2008 (17) sec 199 referred to Para 2 (1959) SCR 379 held impliedly undone Para 17 1989 (2) SCR 320 followed Para 17 2006 (2) SCR 823 referred to Para 17 1977 (2) SCR 435 referred to Para 20 2000 (1) Suppl. SCR 592 referred to Para 20 2010 (10) SCR 804 referred to Para 24 1970 26 S. T. C. 38 referred to Para 25 2008 (12) SCR 843 referred to Para 31 1992 (3) Suppl. SCR 103 referred to Para 41 1965 SCR 908 referred to Para 43 (1988) Supp sec 580 referred to Para 45 2001 (2) SCR 790 referred to Para 45 2001 (1) SCR 608 referred to Para 46 2000 (1) SCR 594 stood overruled Para 46 2007 (8) SCR 927 referred to Para 46 (1939) 62 C. L. R. 272 referred to Para 47 KARNATAKA 1989 (2) SCR 918 referred to Para 48 (2008) 9 sec 191 referred to Para 50 AIR 1954 All 700 referred to Para 74 (1861) 1 8. & $. 272 referred to Para 77 (1935) 1 KB 579 referred to Para 78 (1964) 2 SCR 879.

referred to Para 79 1972 (2) SCR 937 referred to" Para 82 1984 (2) SCR 248 referred to Para 84 2005 (2) SCR 152 referred to Para 87 1976 (0) Suppl. SCR 131 referred to Para 88 CIVIL APPELLATE JURISDICTION : Civil Appeal No. 8672 of 2013 etc. From the Judgment' and Order dated 06. 08. 2007 of the High Court of Karnataka at Bangalore in Writ Appeal being W. A. No. 1409 of 2007. WITH C. A Nos. 8673-8684, 8685, 8686, 8687, 8688, 8690, 8691. 8692, 8693, 8695, 8696, 8697, 8698 &8699 of 2013 Dr. AM. Singhvi, K. V. Vishwanathan, N. Venkatraman, K. N. Bhat, Shekhar Naphade, Sameer Parekh, Sumit Goel, Rukhmini Bobde, Somanadri Goud K. (for Parekh & Co. ) Amol Chitale, Pragya Baghel, Nirnimesh Dube, Kamna Sagar, Ardhendumauli Kumar Prasad, Parimal Shroff, Mahesh Agarwal, Abhinav Agrawal, E. C. Agrawala, Ankur Saigal, R. V. Prasad, Praveen Kumar, Shivaji M. Jadhav, Sanjay Kunur, • R. N. Keshwani, Rishi Agrawala, Prasenjit Keswani, Ranjeeta Rohtagi, V. Patkar, Ashwin Acharya, S.

Ravi Shankar, Sanjay V. Kharde, Naira Jejeebhoy, Asha Gopalan Nair, Anitha Shenoy, Neha Singh, Chinmoy Khaladkar, Preshit V. Surshe, Sachin J. Patil, Randhir Chawla, Renu Saigal, Amit Thakkar, V. N. Raghupathy for the Appearing Parties. The Judgment of the Court was delivered by ,B R. M. LODHA, J. 1. Leave granted in all these special leave petitions. 2. Does the two-Judge Bench decision of this Court in Raheja Development' lay down the correct legal position? It is 2 to consider this question that in Larsen and Toubro a two- Judge lilench of this Court has referred the matter for. consideration by the larger Bench. In the referral order dated 19. 8. 2008, the two-Judge Bench after noticing the relevant provisions of the Karnataka Sales Tax Act, 195,Z: and the distinction between a contract of sale and a works'contract made the reference to the larger Bench by observing as follows: "We have prima facie some difficulty in accepting the proposition laid down in Para 20 quoted above.

Firstly, in our view, ·prima facie, M/s Larsen & Toubro - petitioner herein, being a developer had undertaken the contract to develop the property of Dinesh Ranka. Secondly, the ' Show Cause Notice proceeds only on the basis that , Tripartite Agreement is the works contract. Thirdly, in the : Show. Cause Notice there is no allegation made by the Department that there is monetary consideration involved in the first contract which is the Development Agreement. Be that as it may, apart from the disputes in hand, the point which we have to examine is whether the ratio of the judgment of the Division Bench in the case of Raheja Development Corporation (supra) as enunciated in Para 1. K. Raheja Development CorporatioR v. State of Karnataka; (2005) 5 SCC 162. 2. Mis. Larsen & Toubro Limited & Anr. v. State of Karnataka & Anr. ; SLP(C) No. 17741 of 2007. MIS. LARSEN & TOUBRO LIMITED v. STATE OF 695 20, is correct.

If the Development Agreement is not a works contract could the Department rely upon the second contract, which is the Tripartite Agreement and interpret it · to be a works contract, as defined under the 1957 Act. The Department has relied upon only the judgment of this Court in Raheja Developmerit Corporation(supra) case because para 20 does assist th-e Department. However, we are of the view that if the ratio of Raheja Development case is to be accepted then there would be no difference between . works contract and a contract for sale of chattel as a chattel. Lastly, could it be said that petitioner - Company was the contractor for prospective flat purchaser. Under the definition of the term "works contract" as quoted above the contractor must have undertaken the work of construction for and on behalf of the contractor (sic. ) for cash, deferred or any other valuable consideration.

According to the Department, Development Agreement is not works contract but the Tripartite Agreement is works contract which, prima facie, appears to be fallacious. There is no allegation that the Tripartite Agreement is sham or . bogus. For the aforestated reasons, we direct the Office to place this matter before the Hon'ble Chief Justice for appropriate directions in this regard, as we are of the view thatJhe judgment of Division Bench in the case of Raheja Development (supra) needs re-consideration by the larger ~~-" • 3. Of the 26 appeals under consideration before us, 14 are from Karnataka and 12 from Maharashtra. Insofar as Karnataka appeals are concerned, it is appropriate that we take the facts from the leading case being Larsen and Toubro2. The ECC division of Larsen and Toubro (for short, "L&T") is engaged in property development along with the owners of vacant sites. On 19. 10.

1995, L&T entered into a development agreement with Dinesh Ranka, owner of the land bearing survey numbers 90/ 1, 91, 92 (Part), 94, 95 and 96/1 (Part) together measuring 34 acres all situated at Kothanur Village, Segur Hobli, Bangalore South Taluk, Bangalore, for construction of a multi-storeyed apartment complex. The owner was to contribute his land and L&T was to coristruct the apartment complex. After development, 25% of the total space was to belong to the owner and 75% to L&T. A power of attorney was executed by 8 the owner of the land in favour of L&T to enable it to negotiate and book orders from the prospective purchasers for allotment of built up area. Accordingly, L&T entered into agreements of sale with intended purchasers. The agreements provided that on completion of the construction, the apartments would be handed over to the purchasers who will get an undivided interest . in the land also.

Sale deeds, thus, were executed in favour of the intended purchasers by L&T and the owner. 4. On 12. 07. 2005, the business premises of L&T were inspected by the Deputy Commissioner of Commercial Taxes {lntelligence-1) South Zone, Koramangala, Bangalore (hereinafter referred to as the 'Deputy Commissioner') and a detailed statement of the Finance Manager was recorded. 5. On 21. 12. 2005, the Deputy Commissioner called upon L&T to furnish the details of development project. L&T furnished details on 24. 07. 2005 and 26. 09. 2005. 6. On 04. 10. 2005, the Deputy Commissioner served a show cause notice on L&T stating that it was liable to tax as per th!! decision of this Court in Raheja Development1. L&T responded to the show cause notice and submitted preliminary objections on 10. 10. 2005. By a further communication dated 10. 11. 2005, L&T objected to the assessment of tax for development of projects by it. The L&T inter alia submitted that G.

the development agreement was not a works contract per se on account of the reasons: {a) the agreement was to develop and market flats to customers; {b) the intent and purpose of the agreement was to develop property by the petitioners on the one hand and the land owner on the other; {c) the construction and development of the said land involved no monetary consideration; and (d) the only consideration was that upon the completion of the entire project, L&T would be entitled to 75 per cent of the same. 7. Again on 04. 01. 2006, the business premises of L&T were inspected and certain documents like agreement copies 8 and other documents relating to the transactions of the sale of flats were seized for the purposes of further investigation and verification. 8. On 02. 02. 2006, the Deputy Commissioner served upon L&T a further notice proposing to tax the sale of materials used in the construction of flats on the ground that it was entitled to 75 per cent of the share of the projects.

L&T filed detailed objections to this notice as well. 9. On 03. 07. 2006, the Deputy Commissioner issued provisional assessment orders under Section 28(6) of the Karnataka Sales Tax Act, 1957 (for short, 'KST Act') for the years 2000-01 to 2004-05. Along with the provisional orders, the Deputy Commissioner also issued demand notices raising a total demand of Rs. 3,99,28,636/-. 10. Initially, L&T preferred a writ petition before this Court challenging the above demands but that writ petition was withdrawn and a writ petition under Art'icle 226 of the Constitution of India was filed before the Karnataka High Court. 11. The Single Judge of the Karnataka High Court noted that the controversy raised by the L&T was covered by the decision of this Court in Raheja Development1 and, accordingly, dismissed the writ petition on 10. 07. 2007 by observing as follows: "From the aforesaid observations of the Apex CourtJt is very much clear that as the petitioner No.

1 had entered · into an agreement to carry out constn,J. ction activity on behalf of someone else for cash or for deferred payment or for any other valuable construction, it would be carrying out works contract and therefore would become liable to pay turnover tax on the transfer involved in such work contracts. It is also not in dispute in this matter that the agreement of sale is entered into between the first petitioner and the buyers of the flat even prior to completion of the construction of the building. Under such circumstances, as has been held by the Apex Court in the RAHEJA DEVELOPMENT CORPORATION's Case, the petitioners are liable to pay the turnover tax on the transfer of goods involved in such 'works contract'. In view of the dictum laid down by thEj recent judgment cited supra, this Court does not find any merit in this writ petition. " 12. L&T preferred an intra-court appeal.

The Division Bench of that Court concurred with the Single Judge and dismissed the writ appeal by expressing its opinion as follows: "In our view, so far as the definition of 'work contract' in almost similar situation as in the present case has been well considered by the Hon'ble Supreme Court in the case of K. RAHEJA DEVELOPMENT CORPORATION (supra). The question as to whether that judgment as per Article 141 of the Constitution of India is the law of the land binding on all the Courts in the Count! )'. Prima facie, we find that the facts and circumstances in that case are almost similar to the present case and as such, the ratio laid down in the RAHEJA's Case and relied upon by the learned Single Judge is, in our view, just and proper.

So far as the other pronouncements are concerned, if the appellant feels that it is necessary to get the pronouncement in RAHEJA's Case reviewed, it is open for him to approach the Apex Court and this Court cannot substitute its own findings on the questions since the same has already been decided by the Apex Court in RAHEJA's case. " 13. Insofar as appeals from Maharashtra are concerned, they arise from the judgment of the Bombay High Court. The Bombay High Court was concerned with the group of matters MIS. LARSEN & TOUBRO LIMITED v. STATE OF 699 wherein challenge was laid to the constitutional validity of Section 2(24) of the Maharashtra Value Added Tax Act, 2002 (for short, "MVAT Act") as amended initially by Maharashtra Act XXXll of 2006 and thereafter by Maharashtra Act XXV of 2007 and Rule 58(1A) of the Maharashtra Value Added Tax 'Rules, 2005 (for short, "MVAT Rules"). 14.

The Division Bench of the Bombay High Court on examination of rival contentions has, inter alia, ~eld; (a) works contract have numerous variations and it is not possible to accept the contention either as a matter of principle or as a matter of interpretation that a contract for works in the course of which title is transferred to the flat purchaser would cease to be works contract; (b) the provisions of MOFA recognise an interest of the purchaser of the apartment, not only in respect of the apartment which forms the subject matter of the purchase, but also an undivided interest, described as a percentage in the common areas and facilities; (c) the amendment to Section 2(24) clarifies the legislative intent that ·a transfer of property in goods involved in the execution of works contract including an agreement for building and .

construction of immovable property would fall within the description of a sale of goods within the meaning of that provision and it brings within the ambit of that expression "transactions of that nature" which are referable to'Article 366 (29-A)(b); (d) by amended definition of the expression "sale" in clause (b)(ii) of the explanation to Section 2(24), the transactions which involve works contract have been covered; (e) the amendment in Section 2(24) does not transgress the boundary set out in Article 366(29-A); (f) Rule 58(1A) of the MVAT Rules provides 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 involved in the execution of the construction contract is also transferred, it is the latter component which is-brought to tax; the value of the goods at the time of transfer is to be calculated after making the deductions which are specified under sub-rule..

(1 ); and (g) Rule 58(1A) provides for a measure for the tax by excluding the cost of the land. 15. The Division Bench of the Bombay High Court, thus, found no merit in the challenge to the constitutional validity of Section 2(24) of the MVAT Act and Rule 58(1A) of the MVAT Rules. The trade circulars and the notifications were also found to be legal and consequently writ petitions were dismissed. 16. We have heard learned senior counsel and counsel for the appellants and learned senior counsel for Karnataka and learned Advocate-General and learned senior counsel for Maharashtra at quite some length. 17. Mr. Rohinton F. Nariman, learned senior counsel for L&T led the arguments on behalf of the appellants. His submission is that Raheja Development' does not lay down correct law.

He submits that insertion of clause 29-A (b) in Article 366 following the 61st Law Commission Report is intended to separate the goods component from the labour and services component of a composite works contract. The amendment does not in any manner undo Gannon Dunkerfey- /3 insofar as that decision defines what a works contract is. In thi~ regard, learned senior counsel extensively referred to the decisions of this Court in Builders' Association• and Bharat Sanchar° . It is argued by him that in Raheja Development1 it was incorrectly assumed that the definition of works contract was wide although the definition of works contract in KST Act and Madras General Sales Tax Act which was under consideration in Gannon Dunkerley-13 was identical. 18. Alternatively, it is argued by Mr. Rohinton F. Nariman that if ii is accepted that the definition of 'works contract' in KST 3. State of Madras v. Gannon Dunkerley and Co. ; (1959) SCR 379. 4 Builders' Association of India and others v.

Union of India and others; (1989) 2 sec 645. 5. Bharat Sanchar Nigam Limited and another v. Union of India and others; (2006) 3 sec 1. Act is wide which takes within its fold the contracts that are not commonly und~rstood as works contract then this would be outside Entry 54 List II of the Seventh Schedule of the Constitution for the reason that "works contract" as understood in Gannon Dunkerley-13 has not in any manner been upset by the constitutional amendment and would have to mean "works contract" as commonly understood. 19. Criticizing the conclusions drawn in paragraph 20 of the judgment in Raheja Development1, it is argued by Mr. Rohinton F. Nariman that these conclusions are incorrect for, (a) the well known tests to determine as to whether a particular contract is a "works contract" or "contract of sale" have not been adverted to; (b) the contract is not read as a whole.

Its substance and the main object has not been looked at and one phrase is torn out of context without adverting to any other part of the contract and based on this reasoning the contract is said to be a works contract; (c) though it is noticed that construction/ development is to be on payment of a price in various installments but does not draw any conclusion from it; (d) it is noticed that developer has a lien on the property but incorrectly states that the lien is because they are not owners.

The lien is obviously so that if monies are not recovered from the prospective flat purchasers, the lien can be exercised, showing thereby that the contract is a contract of an agreement to sell immovable property; (e) after noticing that developer can terminate the agreement if any one installment is not paid and can forfeit 10% of the amount that has been paid and can ultimately resell the flat, it is held that the presence of such a clause does not mean that the agreement ceases to be a "works contract" without appreciating that such a clause would have no place in a works contract and can only be consistent with the contract for the sale of immovable property inasmuch as termination can take place if the entire consideration for the immovable property is not paid; (f) it is stated that if there is termination but there is no re-sale, there would be no works contract only to that extent which is again wholly incorrect because post termination what happens to a particular flat is of no relevance inasmuch as the prospective flat purchaser goes out of the picture; and (g) the distinction between a flat being constructed and a flat under construction is a distinction without a difference for the reason that the judgment notices that if the a{lreement is entered into after the flat is already constructed, there would be no 'sale' and no 'works contract'.

This is obviously for the reason that the flat. has already been developed by the developer using his material and his plan and is sold as such to a purchaser. 20. Mr. Rohinton F. Nariman extensively referred to the decisions of this Court in 8. C. Kame• and Hindustan Shipyard' . With reference to paragraphs 7 to 16, 22 and 24 to 26 in Hindustan Shipyard', it is submitted that in a somewhat similar fact situation, this Court came to conclusion that construction of various ships . for and on behalf of the customer would amount to a 'sale' and not to a 'works contract'. 21. Based on the various clauses of the tripartite agreement, it is argued that the main object of the agreement read as a whole and the substance of the agreement is to sell and convey fraction of the land together with a fully constructed flat only when all installments have been fully paid. The work undertaken is for the joint development of the project as a whole, i. e.

, work is undertaken by the developer for himself and for the owner. The construction is not carried out for and on behalf of the purchaser, but it is carried out entirely by the owner/ developer in order to exploit or get the best price for the land and the structure built thereon from various flat purchasers. The flat is to be sold as a flat and not an aggregate of its component. parts. No work is carried out for the purchaser who gets title to the property only after" all work is complete. Learned senior counsel argued that the ultimate test would be: if a suit for 6. The Assistant Sales Tax Officer and Others v. B. C. Kame, Proprietor Kame Photo Studio; [(1977) 1 SCC 634]. 7. Hindustan Shipyard Lid. v. State of A. P. ; [(2000) 6 SCC 579]. / I specific performance is filed by the flat purchaser against the owner/developer, such suit would invariably be for the conveyance of title and not for the construction of a building.

Conversely a suit by an owner/developer against the flat purchaser would be for payment of consideration of a flat/ fractional interest in the lan. d. Such suit would never be for payment of work done at the behest of the flat purchaser and payment of consideration therefor. It is, thus, submitted that the judgment in Raheja Development1 does not lay down good law and deserves to be overruled. 22. Mr. K. V. Vishwanathan, learned senior counsel for Maharashtra Chamber of Housiog Industries elaborately argued based on the following contentions. First, that to attract Article 366(29-Aj(b) there has to be a "works contract" and in the process ~f executing the works contract if certain transfer of property 1occ1. 1rs, such transfer would be deemed to be sale. If there is/ no works contract, the question of applying Article 366(29-! A)(b) would not arise. A distinction is drawn between "works'; and "works contract".

It is contended that an agreement for sale is an agreement to transfer immovable property as an indivisible whole which will result in the execution of a conveyance. There is no element of works contract involved. Even if for the purpose of complying with the obligations of an agreement for sale, a vendor carries out some works, it is not on account of any works contract. Even if there are some "works" involved, there is no "works contract" between the promoter and purchaser. 23. Secondly, that the applicability of Article 366(29-A) read with Entry 54 of List II will arise only in matters which are otherwise not covered under the ambit of sale and cannot apply to an agreement for sale of immovable property resulting in a conveyance. He pressed into service (i) test of enforceability (ii) common parlance test (view of the reasonable man) (iii) test of substance of the contract and (iv) assignment test.

Insofar as common parlance test and test of substance of the contract are concerned, Mr. K. V. Vishwanathan placed reliance upon Bharat Sanchar6. As regards assignment test, paragraph 36 of the judgment in Builders' Association4 was referred to by the learned senior counsel. 24. Thirdly, that amended definition under Article 366(29- 8 A) has not conferred on the States a larger freedom than what they had before the amendment in regard to their power to levy sales tax under Entry 54 of the State List. Paragraph 40 of the Builders' Association• is relied upon. It is contended that an agreement to sell entered into between the promoter and purchaser continues to remain an agreement to sell and the provisions of MOFA does not change the nature of such agreement. Reference is made to the decision of this Court in Nahalchan'd Laloochand8. 25.

And fourthly, that if State's submissions are accepted, Article 366 (29-A)(b) has to be read as "a tax on the transfer of property (whether as goods or in some other form) involving works" which will not only distort the amendment but will render the words "in goods" redundant. Article 366 (29-A)(b) does not provide for such an interpretation. The phrase "in some other form" takes its colour from the preceding words namely, "transfer of property in goods" and "whether as goods". The said phrase "in some other form" cannot and would not mean the transfer of an indivisible immovable property as a whole. Reliance is placed on the decision of this Court in Purshottam 5 Premji to differentiate between a sale and works contract. It is contended that the distinguishing factors that have been laid down in Purshottam Premji9 which were relied on by the Law Commission should be considered as the only tests to differentiate a works contract and a contract for sale. 8.

Nahalchand Laloochand Private Limited v. Panchali Cooperative Housing Society Limited; (2010) 9 SCC 536. 9. Commissioner of Sales Tax, M. P. v. Purshottam Premji; [1970] 26 S. T. C. 38. MIS. LARSEN & TOUBRO LIMITED v. STATE OF 705 KARNATAKA [R. M. LODHA, J. ] 26. Dr. Abhishek Manu Singhvi, learned senior counsel appearing for Promoters and Builders Association made brief oral submissions which were followed by detailed written submissions.

The principal issue, according to him, is, wl:Jether the agreement entered into between a promoter/developer and a flat purchaser, pursuant to the provisions of Section 4 read with Rule 5 and Form V of MOFA can be divided into two parts, {i) an agreement between the promoter/developer and the flat purchaser to construct a flat; and (ii) an agreement between the promoter/developer and the flat purchaser to eventually sell the flat so constructed and whether the first part of the said agreement can be treated as a works contract whereby the flat purchaser is accorded the status of a principal employer and the promoter/developer acts as a mere contractor for him and constructs the flat for and on behalf of the flat purchaser. While conceding that an integral part of the transaction of sale of a flat is the activity of construction of the said flat but the moot question in his view is whether such activity of construction has the characteristics or elements of works contract.

Learned senior counsel highlighted the distinguishing features between "works contract" and "contract for sale of goods" and having regard to that it is submitted that the activity of construction undertaken by the promoter/developer cannot be said to be works contract for the reasons, (i) that developer does not construct at the behest of the flat purchaser as on various occasions the flat is constructed without there being any booking for the said flat; (ii) the main intention of the agreement between the promoter/developer and the flat purchaser is the sale of flat and not to appoint the developer as the contractor of the flat purchaser for the purposes of carrying out the construction of the flat for and on behalf of the flat purchaser; (iii) the flat purchaser does not have any role in conceptualizing the project of construction nor does he have any say in the designing and lay-out of the building to be constructed.

The flat purchaser does not have any control over the type and standard of the material to be used in the construction of the building. He does not get any right to- monitor or supervise the construction activity; (iv) the ownership in the material used in the construction remains with the promoter/developer and the said ownership passes to the flat purchaser only on the eventual conveyance of the flat; (v) the accretion to the goods happens in the hands of the promoter/developer and not when the flat is conveyed to the flat purchaser; and (vi) the construction linked payment schedule is nothing but a method of payment in installments. 27. It is the submission of Dr. Abhishek Manu Singhvi that Article 366(29-A)(b) by a deeming fiction only deems the transfer of property in goods in execution of a works contract as a sale but the said amendment does not contemplate a deemed transfer of goods which actually does not happen at the time of execution of the contract.

The provisions of MOFA do not change the character of the transaction entered into between the promoter/developer and the flat purchaser from that of a pure sale of immovable property to a works contract. Even in the absence of a statute like MOFA, the obligations and restrictions prescribed ~herein would still be present as part of obligations under the Indian Contract Act/Transfer of Property Act and its penalties for breaching the same would still be applicable under the penal statutes. 28. While referring to Section 2(24) MVAT Act, it is submitted by the learned senior counsel that a plain reading of amended explanation b(ii) to Section 2(24) of that Act will show r. tat the said provision has not brought within its scope transactions which are not in their substance works contract. The amendment brought in explanation b(ii) to Section 2(24) is merely explanatory in nature.

Even after the amendment the transaction in which there is transfer of property in goods has to be works contract. The amendment cannot be interpreted to mean that transfer of property in goods in execution of any agreement even if it is not a works contract has now been included in the definition of sale. Such interpretation will render the provision unconstitutional. Learned senior counsel submits KARNATAKA [R. M. LODHA, J. ] that the manner in which the State Government is expanding scope of Section 2(24) on the basis of the decision of this Court in Raheja Development1. it has rendered the said provision unconstitutional. According to Dr. Abhishek Manu Singhvi, Raheja Development' therefore needs to be reconsidered and overruled. 29. As regards constitutional validity of the provisions of Rule 58(1) and 58(1A) of MVAT Rules, it is submitted' that these Rules and Rule 58(1-A) of the 2005 Rules include an element of profit eamed by a promoter/developer on the sale of a flat.

There are no provisions to take the profit element from arriving at the value of goods. As a result income earned by the promoter/developer from the profit on sale of the flat also gets included in the value of goods and eventually the said income gets taxed. Imposition of such tax on the income of the promoter/developer is beyond the legislative competence of the State Government. 30. Without prejudice to the above arguments, it is firstly submitted that assuming that the activity of construction · undertaken by the developer is a works contract then the same would be a works contract only from the stage when the developer enters into a contract with the flat purchaser. Only the value addition made to the goods transferred after the agreement is entered into with the flat purchaser can be made chargeable under MVAT Act.

VAT cannot be charged on the entire sale price as described in the agreement entered into between developer and flat purchaser as sought to be done under the composition scheme. Secondly, it is submitted that assuming that the agreement entered into between the developer and the flat purchaser has two components. namely, a works contract and sale of proportionate share in the land then the stamp duty on such transaction should be levied under Article 25 (stamp duty for conveyance) only on the component sale of proportionate share in the land and the stamp duty on the value of construction carried out ought to be charged under · Article 63 (stamp duty for works contract). 31. Mr. N.

Venkatraman, learned senior counsel for Builders Association while highlighting the background in which clause (29-A) came to be inserted in Article 366 and drawing distinction between a conventional sale and a works contract submits that 'transfer' is imminent and indispensable requirement in both but in the case of a conventional sale, property in goods gets transferred as intended by the parties while in a works contract, property in goods get transferred through accretion. Few illustrations have been referred to by him and it is submitted that 'test of accretion' which is sine qua non for works contract is not satisfied in the agreements under 10 consideration.

L&T 11 is referred which says, "once the work is assigned by L&T to its sub-contractor, L&T ceases to execute the works contract in the sense contemplated by Article 366 (29-A)(b) because property passes by accretion and there is no property in goods with the contractor which is capable of 0 a re-transfer whether as goods or in some other form". 32. Learned senior counsel contends that when ultimately the constructed flat is transferred or sold, it becomes a sale of : an immovable property at which point of time the question of transfer on accretion does not arise. The transfer of goods has to take place in the course of the construction of a building before becoming an immovable property though the contract may be indivisible contract for construction of a building in the form of an immovable property. Once it becomes an immovable property, Article 366(29-A)(b) cannot be pressed into service to such a transaction.

He submits that an agreement to sell is not a sale in its conventional sense and, therefore, cannot be a deemed sale also. 33. It is submitted by Mr. N. Venkatraman that Section 2(24) of MVAT Act and Rules 58 and 58(1A) of MVAT Rules seek to redefine the taxable event by moving away from theory 10. State of Andhra Pradesh & Ors. v. Larsen & Toubro Ltd. & Ors. ; [(2008) 9 sec 1e11. of accretion to transfer of immovable property by way of conveyance and that renders these provisions unconstitutional. 34. Mr. Vinod Bobde, learned senior counsel appearing on behalf of Promoters and Builders Association, Nasik argues that after insertion of clause 29-A in Article 366, the works contract which was an indivisible one has by a legal fiction altered into a contract which is divisible into one for sale of goods. and the other for supply of labour. Thus, the goods component is exigible to sales tax. However, the amendment has not enlarged the meaning of "works contract" as commonly understood.

With reference to Section 2(24) explanation (b)(ii) of the MVAT Act, learned senior counsel submits that this provision aims at taxing the sale of goods involved in the execution of a works contract. In the case of a building contract on land, the contractor must be carrying out the building activity for consideration which obviously means that he should be receiving consideration from the person who has engaged him as contractor. The provision does not cover an owner or developer of land who is constructing a building for the purpose of ultimately selling the flats therein to purchasers. Such owner or developer does not receive any consideration from anyone for carrying out of the building activity; what he receives is simply the sale price of the flats from the purchasers. According to Mr. Vinod Bobde, the provisions so read would not transgress Article 366 (29-A) but if it is read as was done in Raheja Development1, it would be unconstitutional. 35. It is argued by Mr.

Vinod Bobde that an agreement of sale whether simplicitor or in Form V under the MOFA is not a "works contract". It only settles terms for the sale of property and the sale ultimately takes place in pursuance thereof unless the contract is terminated. The ''works" component and "goods" component are totally absent in the agreement. There is no question of taxing sale of goods in an agreement of sale. The buyer does pay the sales tax on the purchase of goods/material used in construction of the building. Such goods/materials are purchased from the dealers registered under the Act. What the taxing authorities seek to do by treating an agreement for sale of immovable property, namely, flat to be a "works contract" within the meaning of Section 2(24), explanation (b)(ii) is to again tax the goods used in the construction of the building.

This cannot be done because the builder is not building as the contractor for the flat purchaser but for himself, and he cannot possibly transfer such goods to himself. 36. Mr. Vinod Bobde submits that the High Court's view that the. element of sale of immovable property can be there in a works contract is clearly erroneous. The agreement of sale in Form V under the MOFA is not an agreement simpliciter and the aspect that MOFA creates the right and interest in the flat as a measure for protecting prospective flat purchasers is irrelevant. With reference to Entries 25, 5 and 63 of the Bombay Stamp Act, 1958 which provide for stamp duty on conveyance including an agreement for sale of property, agreement or its record or memorandum of agreement and works contract respectively, _it is submitted that State has been levying stamp duty on agreement of sale under E. ntry 25 and not under Entry 63 and hence the State does not consider an agreement for sale to be a works contract. 37. Mr.

Shivaji M. Jadhav learned counsel appearing for: one of the appellants has broadly followed the above submissions. He submits that expression "in so'me other form" in Article 366(29-A)(b) does not mean immovable property but. some other form of goods being movable property. According t6 him, artificial rules or other enactments like MOFA, Bombay Stamp Act would not be relevant at all in ascertaining whether transfer of property in goods has taken place in the execution of works contract. Model agreement Form V in MOFA does not indicate that construction of a flat by the developer/promoter is being carried on for and on behalf of the purchaser of the flat. Rather it supports the view that buyer is interested in what is constructed as a flat and not the building material. MOFA ; ensures that the theory of accretion is not applicable and the flat purchaser is not left at the mercy of the builder. 38.

Learned counsel also submits that if Section 2(24) explanation b(ii) of the MVAT Act is read in the manner suggested by this Court in Raheja Development1, such provision is rendered unconstitutional. As regards Rule 58(1) and Rule 58 (1-A), the submission of the learned counsel is that these Rules suffer from various infirmities and· are unable to carry out the objectives of MVAT Act. 39. In the counter arguments advanced on behalf of the two . · States - Karnataka and Maharashtra - Raheja Development1 has been stoutly pefended. Mr. K. N, Bhat, learned senior counsel for Karnataka submits that view taken in Raheja Development1 is correct and needs no reconsideration - both on merits as well as on the basis of binding precedents on the principles governing reconsideration of an earlier decision. He submits that Article 366(29-A) uses the phraseology employed in Entry 54 of List II that reads, "taxes on sale or purchase of goods ....

" For the purpose of Entry 54 List II, ·~axes on the sale or purchase of goods" includes "tax on the transfer of property in goods (whether as goods or in some otf:ler form) involved in the execution of works contract". Transfer of property in goods is the essence of definition of 'sale' in Section 4 of the Sale of Goods Act. Article 366(29-A)(b) can be rephrased as "a tax on the sale of goods involved in the execution of a works contract" and in any case by the deeming fiction incorporated 'in the above provision, it shall be deemed to be a sale of those goods by the person making the transfer and a purchase by a person to whom such transfer is made. The taxable event is the deemed sale of goods involved in the execution of works G. contract. Article 366 (29-A) has been inserted to remedy the situation arising from the decision in the Gannon Dunkerley-13 where attempt to levy sales tax on the sale of goods involved in the execution of works contract wa·s held to be unconstitutional.

This was on the basis that a works contract could not be dissected into contract for "works and services" and contract for "sale of goods". Mr. K. N. Bhat submits, relying upon para 41 in Builders' Association4, that definition of 'works contract' KST Act does not go beyond what is contemplated in the Constitution. 4. 9. Mr. K. N. Bhat's submission is that in order to sustain levy of sales tax on the goods deemed to have been sold in the execution of works contract the following conditions are to be met, (a) there must be works contract, i. e. , any contract to do construction, fabrication and the like; (b) the goods deemed to have been sold should have been involved in the execution of a works contract; and (c) the property in those goods must be transferred to a third party either as goods or in some other form. The taxable event is deemed sale. It is irrelevant whether transferee was a party to the works contract.

All that is required to be enquired into is as to whether the goods were involved in the execution of the works. By Forty-sixth Constitutional Amendment, the effect of Gannon Dunkerley-13 has been . neutralized. Now that the works contract which was indivisible according to Gannon Dunkerley-13 are divisible and the goods involved in the execution of works contract that were then not. ' ' taxable are now taxable. ' 41. The whole idea by insertion of clause 29-A(b) in Article· 366, Mr. K. N.. Bhat submits, is to make the materials used in' the buitding activity liable to sales tax. Any other interpretation will be contrary to the two decisions of the Constitution Benches 11 in Builders' Association4 and Gannon Dunkerley-11 • So construed works contract simply means a construction activity. If the building is retained by the builder himself, there is no deemed sale. 42. Mr. K. N. Bhat, however, submits that the statement of law in Raheja Development1 that when a completed building 11.

M/s. Gannon Dunkerley & Co. and others v. State of Rajasthan and Others; [(1993) 1 sec 364]. MIS. LARSEN & TOUBRO LIMITED v. STATE OF 713 is sold, there is no works contract and, therefore, no liability to tax, may not be correct statement of law. If the building was intended for sale and is in fact sold, tax is attracted to the deemed sale. Even in such cases, goods used in the construction are deemed to have been sold by the builder (dealer) to the purchaser. 43. It also urged by Mr. K. N. Bhat that in the referral order, the Bench has entertained certain doubts in respect of th! f. decision of this Court in Raheja Development1 . However, suci1 doubts that a better view was possible is not good enough to reconsider the decision.

Relying upon decisions of this Court in Gannon Dunkerley-II" and the-earlier decision in Keshav 12 Mills , he submits that while recommending reconsideration of an earlier decision, the Bench must first come to the conclusion that the earlier decision was· clearly wrong for the reasons stated. According to him,)vithin the settled standards, recommendation to consider Raheja Development1 does not fall. Moreover, since Raheja Development1 in May, 2005 almost all States have modified their laws in line with Raheja Development1 and the need for change in a settled' practice is not made out. · 44. Mr. Darius Khambata, learned Advocate General and Mr. Shekhar Naphade, learned senior counsel advanced arguments on behalf of Maharashtra. It is argued that after insertion of Article 366 (29-A)(b) in the Constitution, the transfer of movable property in a works contract is deemed to be sale even though it is not a sale as per the Sale of Goods Act. The works contract is now divisible.

Article 366(29-A)(b) clarifies that the transfer of the goods may be as goods or in some other form. Therefore, the goods may remain as goods or cease to be goods, i. e. , they may merge into immovable property. In this regard, extensive reference has been made to Builders' Association4 and it is submitted that the same submissions 12. Keshav Mills Co. Ltd. v. Commissioner of Income Tax, Bombay North, Ahmedabad; [AIR 1965 SC 1636]. made by the States which were rejected by this Court in .. Builders' Association4 are now sought to be raised almost on similar lines by the appellants which have been rightly rejected by the High Court. . '..... ' 45. Learned Advocate General and learned senior counsel 8 for Maharashtra submit that the term ''works contract" is nothing but a contract in which one of the parties is obliged to undertake or to execute works. The expression "works" is extremely wide and can either mean the act of bestowing labour or that on which the labour is bestowed.

In this regard, the two decisions 3 14 of this Court (i) Dewan Joynal Abedin' and (ii) Kartar Singh have been referred. It is submitted that the term "works" would include the final product and, therefore, a works contract cannot be confined to a contract to provide labour and services but is a contract for undertaking or for bringing into existence some "works". Nothing in Article 366(29-A)(b) limits the term "works contract". Although, works contract usually have only two elements, i. e. , labour and services as well as sale of goods but the addition of few other elements does not denude such contract being works contract. It is possible that there could be a works contract coupled with the sale of immovable property. The transaction does not cease to be a works contract merely because it may include other obligations. 46.

Learned Advocate General argues that even in the case of a works contract, the ownership of the goods need not pass only by way of accretion or accession to the owner of the immovable property to which they are affixed or upon which the · building is built; property can pass under the terms of a contract or' by statute. He submits that the tests laid down in judgments prior to Forty-sixth Constitutional Amendment for determining whe\her· a contract is a works contract or a sale of goods are no longer applicable. There is no question of ascertaining the dominant intention of the contract now since the sale of goods 13. Dewan Joynal Abedin v. Abdul Wazed; [(1988) Supp SCC 580]. · 14. Kartar Singh Bhadana v. Hari Singh Nalwa & Ors. ; [(2001) 4 SCC 661]. element is a deemed sale under Article 366(29-A)(b) and can be taxed separately.

Hindustan Shipyard' was distinguished 15 and it was submitted that in Associated Cement a three-Judge Bench of this Court has overruled the decision in Rainbow 16 Colour Lab and it has been expressly noted that cases such as Hindustan Shipyard' relate to the situation prior to Fortysixth Amendment where the court had no jurisdiction to bifurcate a works contract and impose sales tax on the transfer of property in goods involved in the execution of the contract. Reference was also made to a decision of this Court in P. N. C. 17 Construction . According to learned Advocate General, it has now become possible for the States to levy sales tax on the value of the goods involved in the works contract in the same way in which the sales tax was leviable on the price of the goods supplied in a buil~ng contract. This is where the concept of "value addition" comes in.

It is on account of Forty-sixth Amendment to the Constitution that the State Government is empowered to levy sales tax on the contract value which earlier was not possible. 47. Mr. Darius Khambata submits that a composite contract comprising both a works contract and a transfer of immovable property does not denude it of its character as a works contract. According to him, Article 366(29-A)(b) provides for a situation where the goods are transferred in the form of immovable property. He referred to an Australian case, M. R. 18 Hornibrook in this regard which has been approved by this 4 Court in Builders' Association . 48. Learned Advocate General has also pressed into 15. Associated Cement Companies Ltd. v. Commissioner of Customs; [(2001) 4 sec 593]. 16. Rainbow Colour Lab & Anr. v. State of M. P. & Ors. ; [(2000) 2 SCC 385]. 17. State of U. P. & Ors. v. P. N. C. Constn,ction Co. Ltd. & Ors. ; [(2007) 7 SCC 320] 18. M. R. Hornibrook (Ply. ) Ltd. v.

The Federal Commissioner ofTaxation; [(1939) 62 C. L. R. 272. service the aspect theory of legislation. His submission is that different aspects of the same transaction can involve more than one taxable event. There is nothing to prevent the taxation of different aspects of the same transaction as separate taxable events. This would not constitute a splitting of an indivisible contract. Reference is made to a decision of this Court in Federation of Hotel & Restaurant'•. The submission. of the learned Advocate General is that transfer of immovable property cannot be taxed as a sale of goods but there is no constitutional bar to tax only the sale of goods element and separately tax the transfer of immovable property. Taxing the sale of goods element in a works contract under Article 366 (29-A)(b) read with Entry 54 List II is permissible, provided the tax is directed to the value of the goods and does not purport to tax the transfer of immovable property. 49.

Stoutly defending the impugned judgment of the Bombay High Court, learned Advocate General submits that Section 2(24) explanation b(ii) of MVAT Act has been rightly held to be constitutional as the provisions in the MVAT Act offer diverse options for valuation of the sale of goods element in a works contract. Each of these options is consistent with the methods approved of by this Court in Gannon Dunkerley-II''. 50. As regards challenge to the constitutional validity of Rule 58A and Rule 58(1A), it is submitted by learned Advocate General that these provisions are consistent with the principles laid down in Gannon Dunkerley-II". The measure of tax is not determinative of its essential character or of the competence of the legislature. He sought to dispel the impression that Rule 58(1A) may result in double taxation. Distinguishing the decision of this Court in Larsen & Toubro-112°, learned Advocate General submits that the observations made in para 19.

Federation of Hotel & Restaurant Association of India, etc. v. Union of India & Ors. ; [(1989) 3 sec 634]. 20. State of Andhra Pradesh & Ors. v. Larsen & Toubro Ltd. & Ors. ; [(2008) 9 sec 191]. 19 does not apply to Maharashtra inasmuch as Section 45(4) of the MVAT Act ensures that it is either the builder or the subcontractor who pays the tax (being treated as one and jointly/ severally liable). In any case all claims of alleged double taxation will be determined in the process of assessment of each individual case. 51. Highlighting the MOFA agreement in prescribed Form V, learned Advocate General argues that the clauses therein indicate that it comprises of a works contract along with the agreement for sale. There is no reason to deny the applicability of Article 366(29-A) to such a works contract. His argument is that sale of goods element in the works contract contained in a MOFA agreement is taxable under Section 2(24) explanation b(ii) of the MVAT Act.

As long as there is an obligation to construct under the agreement between the promoter and the flat purchaser (in the case of Maharashtra being an agreement under the MOFA) the deemed sale of goods involved in the execution of such a works contract can be taxed even after incorporation of the goods in the works and when the property passes as between the promoter and the flat purchaser. It is submitted that what is at issue before this Court is not the determination of when the taxable event takes place but the exigibility to tax of a deemed sale of goods in a composite contract. 52. Prior to Forty-sixth Amendment in the Constitution, levy of sales tax on the sale of goods involved in the execution of the works contract was held to be unconstitutional in Gannon Dunkerley-13. That was a case where the assessee (Gannon Dunkerley) was carrying on business as engineers and contractors.

Its business consisted mainly of execution of contracts for construction of buildings, bridges, dams, roads and structural contracts of all kinds. During the assessment year under consideration, the return filed by the assessee showed as many as 47 contracts most of which were building contracts which were executed by it. From the total of the amount which the assessee received in respect of sanitary contracts and other contracts 20 per cent and 30 per cent respectively were deducted for labour and the balance was taken as the turnover of the assessee for the assessment year in question: Sales tax was levied on the said balance treating it as taxable turnover under the Madras General Sales Tax Act, 1939. Assessee questioned the levy of sales tax on the ground that there was no sale of goods as understood in India and, therefore, no sales tax could be levied on any portion of the amount which was received by the assessee from the persons for whose benefit it had constructed buildings.

The Madras High Court concluded that the transactions in question were not contracts for sale of goods as defined under the provisions of the Sale of Goods Act, 1930 which was in force on the date on which the Constitution came into force and, therefore, the assessee was not liable to pay sales tax on the amounts received by it from 0 the persons for whom it had constructed buildings during the year of assessment. It is from this judgment that the matter reached this Court. The Constitution Bench of this Court held that 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 received payment as provided therein, there was neither a contract to sell the materials used in the construction nor the property passed therein as movables.

It was held 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 State Legislature to impose tax on the supply of the materials used in such a contract treating it as a sale. The Constitution Bench said,"........ when the work to be executed is, as in the prese