ASPECTS OF VAT AND CST WITH RELATION TO IMMOVABLE PROPERTY AND CONSTRUCTION CONTRACTS

C. B. THAKAR B.Com.,LLB, F.C.A. Advocat !"# INTRODUCTION In relation to immovable properties, the first thing which comes to our mind is whether sale of immovable property attracts any sales tax ? Under Sales Tax Laws the tax is leviable only on sale of goods ! "s per Sales Tax Laws, only moveable goods are considered to be goods! Therefore immovable properties of any nature cannot fall in the Sales Tax net! Therefore sale of flats#shops etc! cannot be sub$ect matter of Sales Tax! This is uncontroverted position and hence not dealt with further! %owever, whether any particular transaction is for sale of immovable property or is a transaction of sale of moveable goods may become debatable! Such issues mainly arise when alongwith immovable property certain movable goods in fixed condition are also disposed of! &or example, while disposing of &actory building there may also be disposal of machinery fixed in it! "n attempt may be made by Sales Tax authorities to say that to the extent of machinery, there is sale! %owever this cannot be correct in all cases! It depends upon nature of machinery installed! The situation can be seen from two angles! If alongwith immovable property any movable goods passes, but without separate consideration, then in such cases it can very well be said that since consideration is not bifurcated nor possible to be bifurcated, there is no sale of such moveable goods and hence no taxable event arises! The other angle is that the moveable goods are fixed in the building and there is no intention to sever the same before transfer of immovable property! &or example, the machinery is sold in fixed condition and there is no intention

' 2 ' to sever them! In such cases, even if values of factory

building and machineries are shown separately, it can very well be argued that there is sale of immovable property only and not of machinery, as there is no intention to deliver machinery separately as moveable goods! " reference can be made amongst others, to $udgments of Tribunal in case of Lyods Steel Ind. (S.A.2091 of 98 dt.23.3.2001), Herdelia Chemi als Ltd. (S.A. 182! of 1999 dt.31.10.2001), "asa#ra$ %rintin& %ress (S.A.'2' of 8! dt.30.11.8(), Li)ra Leather Ind. Ltd. (S.A.*(9 + *80 of 1988 dt.30.9.89), %aramo,nt Sinters Ltd. (S.A.1220 of 199' dt.20.*.2002) and %e-si o India Holdin&s %. Ltd. (S.A.10(* of 2001 dt.19.0!.2002) etc! %owever if the facts turns out to be otherwise, i!e!, there are separate values as well as intention to sever items is evident, then the transaction to the extent of moveable goods can be considered as amounting to sale! " reference can be made to $udgment in case of Indos#e .n&&. Co.(S.A.13'( of 98 dt.18.11.2000)! Similar different situations can also arise in relation to (or)s *ontract theory and transfer of immovable property depending upon facts of each case! " reference can be made to $udgment of +!S!T! Tribunal in case of Su)h)arta "partments ,S!"!-. to /- of 0..1 dt!1!2!-33-4! In this case appellant was arguing that the activity is not covered by the then (or)s *ontract "ct since there is sale of immovable found argued to property, that that the it being sale of for constructed sale of houses! land and a Tribunal it was agreements is sale of

construction of building were separate, and therefore, though immovable separate property, constructed house, Tribunal held that the construction part is liable (or)s *ontract, being construction contract! " reference is also re5uired to be made to the recent $udgment of Supreme *ourt in 6! 7ahe$a *onstruction ,080 ST*

' 3 ' -.94! In this case the developer constructing building but selling the flats etc! before completion of construction ,sale under Though later! In contrast a case can be considered where it was a composite tenements! In determination order in case of +#s!7ehab %ousing :vt! Ltd!! ; Larsen ; Toubro Ltd!,<=4 ,(*'-33/# >>?'00#"dm'0-#@'-21 dt!-9!1!-3384, the *ommissioner of Sales Tax has held that the transaction is composite one i!e! providing land with constructed tenements and hence it is not covered by Sales Tax :rovisions including (or)s *ontract "ct! Thus, though in normal case it can be said that immovable properties are not sub$ect matter of Sales Tax, in light of above stated contingencies it is necessary to see the implications of Sales Tax Laws on particular facts of the case! In case of sale of flats# shops or bungalows etc! the issue of sales tax will not arise! %owever when the agreements are not so simple but involve two components li)e land and construction or a issue arise whether particular property is immovable property or not, more attention is re5uired to be given to above aspects of Sales Tax! &rom -3!1!-331, the +="T "ct provides for definition of wor)s contract, which is inserted in section -,-84! The said definition reads as under!
(24) sale means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge; and the words sell, buy and purchase, with all their grammatical variations and cognate e pressions, shall be construed accordingly; Explanation. !or the purposes of this clause," (a) a sale within the State includes a sale determined to be inside the State in accordance with the principles formulated in section 4 of the #entral Sales $a %ct, &'() (*4 of &'());

*onstruction4 the $udgment

is is

held

liable

to

(or)s "ct,

*ontract it will

Tax! have

under

6arnata)a

repercussions in +aharashtra also! This aspect is discussed

contract

for

providing

land

with

constructed

' * '
(b) (i) the transfer of property in any goods, otherwise than in pursuance of a contract, for cash, deferred payment or other valuable consideration; (ii) the transfer of property in goods whether as goods or in some other form involved in the e ecution of a wor+s contract namely, an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property """"

%owever inspite of above definition there will not be any change in the legal position discussed above! Unless there are separate contracts for land and construction no tax liability can be attracted! %aving above preliminary observations about sales tax on immovable properties, to my mind the more integrated issues in relation to immovable properties will arise in relation to bringing into existence the immovable properties! In fact the scope of this and paper hence is the to discuss about in liability paper on is contractor discussion this

restricted to aspects of (or)s *ontract Tax under +aharashtra =alue "dded Tax "ct,-33- ,="T "ct4! In other words, the sales tax issues involved in relation to construction of immovable properties are dealt with here! can be as under! (2) CONSTITUTIONAL $ %UDICIAL HISTORY OF WORKS CONTRACTS Antry 89 in list II of Seventh Schedule to the Bovernment of India "ct, 0./C read as Dtaxes on the sale of goods and on advertisement!D (ith effect from <anuary -1, 0.C3 our constitution came into force! Antry C8 of list II of Seventh Schedule to the *onstitution of India, 0.C3 reads as Dtaxes on sale or purchase of goods other than newspapers!D In Bannon >un)erley ; *o! ,+adras4 Ltd! =s! State of +adras ,0.C84 C ST* -01,+ad!4, percentage received by certain towards the turnovers labour company in ,after of deducting the certain certain monies contracts charges4 representing " brief study on above lines

respect

carried out were sub$ected to tax under the +adras Beneral Sales Tax "ct, 0./.! The turnover represented the value of the

' ' ' materials used in building contracts! The assessment was

challenged on the ground that there was no element of sale of materials in a building contract and such a contract was an integral one which could not be split'up! The +adras %igh *ourt held that the transactions were not contracts for sale of goods as defined under the provisions of the Sale of Boods "ct,0./3, company opinion which of not the was in force to pay on the force there date and on was tax on which the the of *onstitution was En by turnover! India liable same came into therefore the the divergence

sales

disputed Supreme

5uestion, *ourts!

different

%igh

Ultimately,

*ourt of India in case of State of +adras =s! Bannon >un)erley ; *o!,+adras4 Ltd!,0.C94 . ST* /C/ affirmed the view ta)en by the +adras %igh *ourt overruling the contrary view ta)en by the %igh *ourts of Fagpur, 7a$asthan, +ysore and 6erla! The Supreme *ourt stated Dthere having existed at the time of the enactment of the Bovernment of India "ct,0./C a well'defined and well established to sell, it distinction would be between proper a to sale and an the agreement interpret

expression DSale of BoodsD in entry 89 in list II of the Seventh Schedule to the Bovernment of India "ct,0./C, in the sense in which it was used in legislation both in Angland and in India and to hold, that it authoriGe the imposition of tax only when there is a completed sale involving transfer of titleD! The $udgment of the apex court in Bannon >un)erley and other $udgments created absolute restrictions on StatesH power to levy tax on the contracts, sales, such as wor)s contract, contracts of art wor), services, food supplied in hotels and restaurants, leases etc! States craving for more and more revenue approached the *enter for getting powers to do what Bannon >un)erley and other $udgments have undone! The Law *ommission of India compulsory hire purchase transactions,

' ! ' considered all these matters in its 10st 7eport and

recommended certain amendments to the *onstitution of India, in conse5uence of which, parliament enacted the *onstitution ,&orty'sixth "mendment4 "ct, 0.9-! It received the assent of the :resident on -'-'9/! =arious articles of the *onstitution were amended, main being introduction of new clause ,-."4 in the "rticle /11 which incorporates various definition clauses! The deemed sale transactions, introduced in clause ,-."4 are as under I D /11! meanings Definitions.' In this *onstitution, unless the respectively assigned to them, that is to context otherwise re5uires, the following expressions have the herein say!!!!!!! ,-.'"4 Htax on the sale or purchase of goodsH includes'' ,a4 a tax on the transfer, otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration J ,b4 a tax on the transfer of property in goods ,whether as goods or in some other form4 involved in the execution of a (or)s *ontract J ,c4 a tax on the delivery of goods on hire'purchase or any system of payment by installments J ,d4 a tax on the transfer of the right to use any goods for any purpose ,whether or not for a specified period4 for cash, deferred payment or other valuable consideration J ,e4 a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration J ,f4 a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drin) ,whether or not intoxicating4,where such supply or service, is for cash, deferred payment or other valuable consideration,

' ( ' and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person ma)ing the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made!D "ccordingly the State Bovernment got power to levy tax upon the (or)s *ontracts! Ta)ing clue from the above amendment to the *onstitution, State Bovernments started levying tax on DsaleD involved in the execution of (or)s *ontract! Aach State Bovernment has a different system, but most of them amended the definition in the local Sales Tax Law to cover levy of taxes on (or)s *ontracts! %owever, the State of +aharashtra enacted a separate legislation called DThe +aharashtra Sales Tax on the Transfer of :roperty in Boods involved in the Axecution of (or)s *ontract "ct, 0.9CD! The "ct came into force from 0!03!91! +eanwhile a confusion prevailed about the taxable 5uantum of contracts! The matters relating to this issue and other related issues emerging from various courts were ultimately its ta)en to Supreme $udgment *ourt! in The case Supreme of *ourt delivered landmar) @uilderHs

"ssociation of India reported in 2/ ST* /23! In this case Supreme *ourt directed that the taxable 5uantum under (or)s *ontract is not the full contract price but only that amount which pertains to transfer of property in goods! The Supreme *ourt also ruled that, the principles for determination of sale in course and of inter'State also the trade and in and course of import#export restrictions conditions

regarding taxation of declared goods are also applicable to DsaleD of goods under (or)s *ontract! To bring the +aharashtra Law in line with above direction, in 0.9., the Bovernment of +aharashtra replaced the act from its inceptionJ i!e!, from 0!03!91,by enactingD the +aharashtra Sales Tax on the Transfer of :roperty in Boods involved in the Axecution of (or)s *ontract ,7e'enacted4 "ct, 0.9.D! &rom 0!8!-33C the above "ct

' 8 ' is merged into ="T "ct,-33-! This today the tax on various contracts is levied under ="T "ct,-33-! ,34 NATURE OF TRANSACTIONS UNDER WORKS CONTRACT The next 5uestion which naturally arises in our mind is regarding the nature of transaction under (or)s *ontract! In case of (or)s to do *ontract, something the Seller to ,i!e!, *ontractor4 then is re5uired more the goods, simple

delivery of goods, as in case of normal HsaleH! Thus, if it is a contract of building construction, the contractor not only delivers various building materials but also performs further wor) on them by embedding them into earth to construct walls etc! The contractee is also not interested in ta)ing the delivery of various building materials as goods but to get them used in construction of walls etc! Thus in such cases the contract comes to an end, not on supplying the goods as goods, but with some more services coupled with them, li)e fitting, embedding in earth etc! =arious examples can further be stated in this respect, li)e repairs of cars, where the contractee is not interested in purchasing the spare parts but further interested in getting them fitted in his car! Thus the DsaleD does not come to an end by delivery of goods but by putting some labour to it to complete the contract! In fact, this was the reason, why Supreme *ourt in case of Bannon >un)erley ; *o! Ltd! ,. ST* /C/4 held that construction of building is not sale of building materials simplicitor but a (or)s *ontract as something more is re5uired to be done by applying labour and getting them used in construction of walls etc! So this is the principle to determine the nature of transaction! @y 81th amendment, as mentioned above, what the *onstitution has done is divided such transaction between sale of goods and other part, by deeming provision and this deemed sale of goods is the sub$ect matter of taxation!

' 9 ' DIVISIBLE&INDIVISIBLE CONTRACTS HSaleH transactions are always sub$ect to contract between the partiesJ parties i!e! want the to seller a and purchaser! Thus whenever the the ma)e transaction divisible, parties

should enter into separate contracts suitably, one for supply of goods and other for wor) and labour on such goods! &or example, in contract of repair of car, the contractor may sell the goodsJ i!e!, spare parts by a separate invoice and by a separate contract, by charging separately, a fitting wor) can be completed! If such division is not made and composite amount is charged, the contract is indivisible contract and will be liable to tax as wor)s contract! In (or)s *ontract as stated above, the goods will be HdeemedH to be sold and will be liable to tax accordingly! Thus whenever the parties want to ma)e the contract divisible, the same should be done by separate contracts as stated above! The supply of goods will then be taxed as normal Sale! It is necessary that when the contracts are made divisible, proper documentation with supporting evidence should be maintained! ,*4 POSSIBLE SITUATIONS OF WORKS CONTRACT TA' IN RELATION TO IMMOVABLE PROPERTIES Formally immovable properties mean the properties of the nature of buildings etc!! It can also include the factory buildings in which machinery etc! are embedded in it! In fact, the issue whether a property is moveable or immovable, depends upon various factors, li)e nature of construction, intention of parties and other relevant factors! The attempt here is not to discuss nature of movable#immovable properties as such! &or this paper the discussion is restricted to contracts of construction of buildings etc! with relation to (or)s *ontract under ="T "ct! In this respect following situations can be discussed! (i) Self onstr, tion of -ro-erty

' 10 ' Under this situation normally a builder will develop property on his own plot! %e will purchase the building materials and will construct the same! %ere no 5uestion of (or)s *ontract Tax arises since it is one s own development and no element of transfer of property in goods to other party is involved! Formally the sale will be of ready flats etc!, i!e!, immovable property and hence not liable to any tax! @ut if there is sale of any moveable items li)e sale of discarded items etc!, to that extent, liability under ="T "ct can arise! %ere the issue is again re5uired to be seen in light of recent $udgment in case of 6! 7ahe$a *onstruction,cited supra4! The above $udgment pertained mainly to >eveloper and its full implications are discussed later! %owever in this $udgment the Supreme *ourt has observed that even if one is not developer but constructing on his own land, still in given circumstances he can be liable to tax! In otherwords, a dealer constructing buildings on his own land but entering into agreement for sale of flats etc! before completion of construction, he can be liable to tax under ="T "ct! This aspect is to be seen alongwith the issues discussed subse5uently in relation to developer! " point about issue of * materials from other states forms for purchase of building in above situation, can be

considered here! "s builder may be getting registered under ="T "ct he can also get himself registered under *ST "ct and hence will become entitled to issue of * form boo)! %owever it may be remembered that when the builder is purchasing the materials for his own construction he cannot be entitled to purchase materials against * forms! (hen he purchases materials for construction of building etc! the intension is to effect sale of ready flats etc!! Surely the materials so purchased against * forms cannot be said to be for purpose of resale or for use in manufacturing of goods for sale etc!! There is no resale or such use in manufacturing etc!, when

' 11 ' materials are used in construction and therefore such use is not fulfilling condition of permissible * form uses not in * form! to Therefore, purchases against is allowable

builder under above circumstances! %owever if the construction is one which is liable to ="T ,as in case of 6! 7ahe$a4 than * form can be issued! (ii) Constr, tion on land )elon&in& to other on the )asis of /e0elo-ment a&reement Under this type, normally a builder will enter into agreement for development of land belonging to other party! It will be $oint development will be The agreement! It is a assumed building be sold here for to that sale the of construction is not for landlord but by $oint development! @uilder constructing flats#shops flats#shops! may prospective

customers when the construction is on! "s ascertained earlier, the construction is not for landlord but on $oint development basis! Secondly even though prospective customers boo) the flats#shops etc! the intention is to give them possession of flats#shops as immovable property! The construction activity itself cannot be said to have been started because of any agreement settled from by customer! Thus this activity orders also passed does by not the attract any (or)s *ontract liability! The above issue is well various determination *ommissioner of Sales Tax! " reference can be made to order in the case of Unity >eveloper ; :aran$ape @uilders ,>>? 0099# *#83# "dm'0- dt!03!/!994! 1. 2ahe$a effe t %owever change is re5uired to be noted here about recent $udgment of Supreme *ourt in 6! 7ahe$a *onstruction ,080 ST* -.94 in relation to above issue! The brief history of (or)s *ontract taxation is already given earlier! %owever the definition of wor)s contract understood by the respective parties! is not given in the *onstitution! Therefore its meaning is left to be

' 12 ' In certain Legislations li)e, 6arnata)a Sales Tax "ct, the definition of (or)s *ontract is given while in +aharashtra Sales Tax on Transfer of property in execution of (or)s *ontract ,7e'enacted4 "ct,0.9. no such definition was given! In +aharashtra =alue "dded Tax "ct,-33- such definition is provided from -3!1!-331, which is reproduce earlier! In above case the controversy arose before Supreme *ourt about the meaning of wor)s contract ! The %onorable Supreme *ourt has laid down a law which will have far reaching effects upon the builders and developers in entire India! The facts in above case are that +#s!6!7ahe$a entered into an agreement with land owner for development of the land with construction of residential and commercial buildings! :ursuant to development agreement, +#s!6!7ahe$a also entered into agreements with its customers for sale of flats#shops! The terms included to handover the possession of flats#shops! The value of land and construction was shown separately! The assessing authorities in 6arnata)a levied sales tax on the said transactions, considering the agreements as sale definition of (or)s *ontract K(or)s *ontract by way of (or)s *ontract within the meaning of 6arnata)a "ct! The in 6arnata)a "ct read as underI includes any agreement for carrying out for

cash deferred payment or other valuable consideration, the building construction, manufacture, processing, fabrication, errection, installation, fitting out, improvement, modification, repair and commissioning of any movable or immovable property!L The argument of assessee was that the construction was on his own property ,because of development agreement with land owner4 and the buyer is to ta)e possession of flat#office! It was further argued that there is, therefore, no transfer of property in goods in execution of wor)s contract, since a owner of land property cannot execute agreement for transfer of building materials while constructing on his own land!

' 13 ' Therefore it was submitted that the sale was of flat and offices, not liable to sales tax! Supreme *ourt, however, negatived above submission! Supreme *ourt, relying upon the above given definition, held that the scope is wider than normal meaning of (or)s *ontract and includes the contracts entered into while the flat#office is under construction! Supreme *ourt observed that constructing building on one s own land ,but shown as sold separately in agreement4 does not ma)e any difference! Supreme *ourt further clarified that if the agreement is for sale of flats etc!, after the construction is complete, then of course, it will not attract any sales tax as it will be a sale of immovable property! Therefore the above law declared by Supreme *ourt will bring the developers# builders within the purview of sales tax liability if the facts are similar! To the extent of agreements entered into before *onstruction of flats or offices is complete, the liability as wor)s contract can arise! In +aharashtra, as mentioned earlier the *ommissioner of Sales Tax has ta)en a view that in case of developers#builders constructing buildings and entering into agreements before construction is complete, there is no sales tax liability under (or)s *ontract "ct! %owever now the situation may change! Upto 0.!1!-331 (or)s *ontract was not defined under the +="T "ct! &rom -3!1!-331 the term is defined as reproduced earlier! The effect of 6! 7ahe$a is to be seen in light of this development and if facts are similar to facts in case of 6! 7ahe$a liability can arise! "s per Supreme *ourt, entering into agreement before the construction is complete, amounts to deemed sale, by way of transfer of property in goods in the execution of (or)s *ontract! %owever it has to be )ept in mind that the above $udgment can apply, where the value of land and construction is separately mentioned and agreed upon! In ma$ority cases in +aharashtra this is not the position and

' 1* ' composite values are shown! Therefore its applicability will be limited to the cases where land value and construction is shown separately! (iii) Constr, tion Contra tor The normal position which we come across day to day is that a developer#builder through the gets the %e wor) may of construction the whole completed contractor! award

construction wor) to one contractor or may divide the wor) and award different wor)s to different contractors! &or example, he may appoint one contractor for whole construction or may appoint different contractors for different wor)s, li)e for construction, for electrical fittings etc!! %owever in all these cases the contractor will be the person who will be liable to discharge tax liability! "s a contractee or employer, builder will not be liable to any (or)s *ontract Tax! There is no concept of unregistered dealer purchases under ="T "ct and hence whether the contractor is registered or not, no liability on builder can arise as purchases from U7> etc! It may also be noted that if builder himself purchases the goods and gives contract for labour portion only, then there is no 5uestion of any liability under ="T "ct! Thus the liability, if any, is to be seen in light of above facts! Aven if the purchases are from unregistered dealers, still there will not be any liability on such purchases under ="T "ct as there is no concept of levy of purchase tax! In fact under above category many different situations can arise depending upon the facts of each case! The facts of each agreement are to be considered carefully to see whether the contract is covered by ="T "ct or not and accordingly the liability, if any, be decided! In this respect it can further be noted that if builder gives the contract liable under ="T "ct to contractor, then his liability can be only upto the extent of >eduction of Tax

' 1' ' on contract and payment of same to Bovernment! "s stated above there is no direct burden of tax on him! The indirect tax burden will fall on builder, as contractor will pass on his burden to the builder and hence builder should be aware of the provisions of ="T "ct to estimate and see) ways for minimiGing the tax burden! The various situations of discharging (or)s *ontact tax under ="T "ct are discussed subse5uently which can be considered for estimating the liability! Similarly the T>S provisions under ="T "ct are also discussed subse5uently! (') Contra tor3s lia)ility 0is4540is Constr, tion Contra ts6 78A9 A t The main issue in relation to immovable properties is the issue of tax on contractors appointed for construction! "s is the case in ma$ority of cases, the construction is done by contractors! The meaning of (or)s *ontract as also the ways to ma)e the contracts divisible are already discussed above! The historical bac) ground leading to levy on (or)s *ontract is also already seen above! The liability on contractor is ultimately the liability on builder! The builder may also be some time doing contract activities! In nutshell, it is necessary to study the provisions of ="T "ct to )now the burden upon the contractors! The important provisions of ="T "ct relating to (or)s *ontract can be discussed briefly as under! The liability is re5uired to be discharged in relation to value of goods! "s stated above tax is payable on value of goods and not on labour portion! &ollowing are three ways of discharging tax liability under +="T "ct,-33-! This will apply to construction contractor as well as other (or)s *ontractors also! 1. "s per Statutory :rovisions Under this system the tax payable on value of goods can be arrived at by adopting 7ule C9 of ="T 7ules,-33C! The 7ule C9,04 is as underI

' 1! '
58. (&) $he value of the goods at the time of the transfer of property in the goods (whether as goods or in some other form) involved in the e ecution of a wor+s contract may be determined by effecting the following deductions from the value of the entire contract, in so for as the amounts relating to the deduction pertain to the said wor+s contract,"" (a) labour and service charges for the e ecution of the wor+s where the labour and service done in relation to the goods is subse-uent to the said transfer of property; (b) (c) amounts paid by way of price for sub"contract , if any, to sub"contractors ; charges for planning, designing and architect.s fees;

(d) charges for obtaining on hire or otherwise, machinery and tools for the e ecution of the wor+s contract; (e) cost of consumables such as water, electricity, fuel used in the e ecution of wor+s contract, the property in which is not transferred in the course of e ecution of the wor+s contract; (f) cost of establishment of the contractor to the e tent to which it is relatable to supply of the said labour and services; (g) other similar e penses relatable to the said supply of labour and services, where the labour and services are subse-uent to the said transfer of property; (h) profit earned by the contractor to the e tent it is relatable to the supply of said labour and services, /rovided that where the contractor has not maintained accounts which enable a proper evaluation of the different deductions as above or where the #ommissioner finds that the accounts maintained by the contractor are not sufficiently clear or intelligible, the contractor or, as the case may be, the #ommissioner may in lieu of the deductions as above provide a lump sum deduction as provided in the $able below and determine accordingly the sale price of the goods at the time of the said transfer of property0

Ta()
Serial 1o0 $ype of 2or+s contract *%mount to be deducted from the contract price (e pressed as a percentage of the contract price)

(&) & 2 3 4

(2) 4nstallation of plant and machinery 4nstallation of air conditioners and air coolers 4nstallation of elevators (lifts) and escalators !i ing of marble slabs, polished granite stones and tiles (other than mosaic tiles)

(3) !ifteen per cent0 $en per cent0 !ifteen per cent0 $wenty five per cent0

#ivil wor+s li+e construction of buildings, bridges, roads, etc0

$hirty per cent0

#onstruction of railway coaches on under

$hirty per cent0

' 1( '
carriages supplied by 5ailways * Ship and boat building including construction of barges, ferries, tugs, trawlers and dragger 6 !i ing of sanitary fittings for plumbing, drainage and the li+e ' &7 /ainting and polishing #onstruction of bodies of motor vehicles and construction of truc+s && &2 &3 &4 8aying of pipes $yre re"treading 9yeing and printing of te tiles %ny other wor+s contract $wenty per cent0 !orty per cent0 !orty per cent0 $wenty per cent0 $wenty per cent0 $wenty per cent0 !ifteen per cent0 $wenty per cent0

* $he percentage is to be applied after first deducting from the total contract price, the amounts paid by way of price for the entire sub"contract to sub" contractors, if any0

(a)

It can be seen that as per 7ule C9,04 main provision,

contractor can determine his own labour portion and ta)e deduction of the same from gross contract value! The balance will be liable to tax! The said taxable portion is to be divided between 3M,8M and 0-!CM goods and tax be wor)ed out accordingly! ()) In the alternative, i!e!if contractor can not ascertain the labour portion on his own, he can adopt the standard deduction given in Table! The portion remaining after given deduction will be liable to tax at applicable rates i!e!3M,8M and 0-!CM! It may also be mentioned that if one follows any of above methods, he can avail full set off on goods purchased under ="T from local 7>, sub$ect to other conditions of set off! 2. In the alternative contractor can pay tax by *omposition Scheme and in that case, he will be re5uired to pay tax on full contract value N 9M! Fo deduction of labour charges etc! will be available! If one pays tax as per above composition

' 18 ' scheme, he will be entitled to setoff N 18M of the normal set off otherwise available! &rom -3!1!-331, it is provided that in relation to notified construction contracts the composition rate will be CM! %owever the above provision is not effective as on today since the construction contracts are still not notified! It can also be mentioned that the choice of method can be made per contract! !*# SET OFF Set off on purchases is bac)bone of ="T System! Under ="T "ct#7ules, set off is available on all purchases as per 7ule C-, sub$ect to reductions in 7ule C/ and negative list in 7ule C8! "s stated pays above tax reduction under of set off will %e arise will if be contractor cases! So far as negative list is concerned mainly reference is re5uired to be made to 7ule C8,g4 and C8,h4! The said rules are as underI
54. 1o set"off under any rule shall be admissible in respect of, " (g) purchases effected by way of wor+s contract where the contract results in immovable property, (h) purchases of building material which are not resold but are used in the activity of construction,

*omposition

Scheme!

entitled to set off N18M instead of full set off as in other

Thus by later 7ule the set off on purchase of building materials is prohibited if they are not resold but used in *onstruction activity! %owever the contractor when uses the materials in construction contract he is actually selling the goods and is accordingly liable to tax under ="T "ct! %ence contractor will not be hit by above prohibition! The prohibition will operate on the builders if they purchase the materials and use it in own construction activity! %owever as stated above though contractors are entitled to set off on building materials, it is available only if he resales the goods! The resale means using the goods in same

' 19 ' form etc!! %owever if the contractor uses the goods after manufacturing, then whether he will be entitled to set off on purchases, is again an issue! It appears that there is no intention to disallow set off to contractor simply because he is using the goods after manufacturing! The above use of words 7esale, appears to be unintentional and a word from Bovernment will certainly help in clarifying the position! The other 7ule C8,g4 prohibits set off in case (or)s *ontract results in immovable property! Ef course, this clause cannot apply to contractor but it will apply to builder for whom contractor wor)s! Ef course, there are still further negative rules which should be considered to )now correct position of set off to contractor! !+# LIABILITY OF CONTRACTOR $ SUB,CONTRACTOR Section 8C,84 of the ="T "ct deals with the liability of *ontractor vis'O'vis sub'contractor! Formally, the contractor and sub'contractor are independent from each other and one cannot be responsible for the other! %owever, by specific provision in section 8C,84 the relationship between contractor and sub'contractor has been treated as of principal and agent! "s the relationship is treated as that of principal#agent, both become liable for each otherHs liability to the extent of contracts executed for each other! It is also pertinent to note that even if one of them is liable to tax, the turnover effected in hands of otherJ i!e!, either contractor or sub' contractor as the case may be, will be liable to tax, even though in his individual capacity he may not be liable! To avoid double taxation it is provided that where the contractor or sub'contractor has paid tax on turnover effected by it, the other party should not be liable to pay tax in respect of the same turnover! The contractor or the sub'contractor should obtain the *ertificate in &orm 831 or 832, as applicable, from the other party! In case the contractor#sub'contractor is covered by *omposition Scheme the said certificate should be

' 20 ' in the &orm 839 or 83. as the case may be! It is advisable to obtain both the applicable forms from other party! !-# T.D.S PROVISIONS FOR WORKS CONTRACT TRANSACTIONS !S ct.o/ 0" a/d R1) 23# The T>S provisions were there under the earlier +aharashtra (or)s *ontract "ct, 0.9.! Under ="T "ct also the provisions are continued but with certain changes! The important ingredients of the provisions can be noted as under! i4 Section /0 of the ="T "ct authoriGes the *ommissioner of Sales Tax to bring suitable T>S scheme in respect of sales! The T>S provisions can be for any normal sale or for (or)s *ontract etc! ii4 iii4 "t present the T>S is made applicable to (or)s *ontract transactions! @y order dated 0!8!-33C ,replaced by order dated -.!9!-33C4 the *ommissioner of Sales Tax has specified the list of employers liable to T>S and the rates of T>S! iv4 underI Sr.:o Classes of .m-loyers 0 The *entral Bovernment and any State Bovernment, Amo,nt to )e ded, ted -M of the amount payable as above in the case of a contractor who is a registered dealer and 8M in any other "ll Industrial, *ommercial or Trading underta)ings, *ompany or *orporation of the *entral Bovernment or of any State Bovernment, whether set up under any special law or not , and a :ort Trust set up under the +a$or case! -M of the amount payable as above in the case of a contractor who is a registered dealer and 8M in any other case! The list of employers liable for deduction of T>S is as

' 21 ' :orts "ct, 0.1/, " company registered under the *ompanies "ct, 0.C1,

-M of the amount payable as above in the case of a contractor who is a registered dealer and 8M in any other case! -M of the amount payable as above in the case of a contractor who is a registered dealer and 8M in any other case! -M of the amount payable as above in the case of a contractor who is a registered dealer and 8M in any other case -M of the amount payable as above in the case of a contractor who is a registered dealer and 8M in any other case -M of the amount payable as above in the case of a contractor who is a registered dealer and 8M in any other case

" local authority, including a +unicipal *orporation, +unicipal *ouncil, Pilla :arishad, and *ontonment @oard,

" co'operative Society excluding a *o'operative %ousing Society registered under the +aharashtra *o'operative Societies "ct, 0.13,

" registered dealer under the +aharashtra =alue "dded Tax "ct, -33-!

"n Insurance or &inance *orporation or Schedule *ompanyJ and any @an) included in the Second to the 7eserve @an) of India "ct, 0./8, and any scheduled @an) recogniGed by the 7eserve @an) of India!

' 22 '

Trusts, whether public or private

-M of the amount payable as above in the case of a contractor who is a registered dealer and 8M in any other case -M of the amount payable as above in the case of a contractor who is a registered dealer and 8M in any other case

*o'operative %sg! Society if contract more than 7s!03 La)hs

v4 dealer! vi4

The rates of T>S are prescribed at -M if the contractor is registered dealer and 8M if the contractor is unregistered The T>S is not to be made when the payment or aggregate of payment to the contractor in a year is less than 7s!C la)hs! In other words it will apply when the payments are exceeding 7s!C la)hs!

vii4

The T>S is to be deducted from net amount and no T>S is re5uired to be deducted from sales tax#="T separately charged or service tax charged separately by the contractor!

viii4 ix4 x4 xi4

T>S should not exceed the tax payable by such contractor! T>S should not apply to contracts ta)ing place in course of inter'state trade or in course of import# exports! Fo T>S is re5uired when principal contractor is ma)ing payment to sub'contractor! In relation to advance payment, the T>S will apply as and when the advance payment is ad$usted towards the actual amount payable to the contractor!

' 23 ' xii4 xiii4 There are provisions for obtaining certificates for no deduction! The application is to be made in &orm Fo! 803! The credit of T>S should be available to dealer from whose payment the T>S is deducted! The credit will be available in the relevant period in which T>S is deducted or when T>S certificate is furnished by contractee to contractor! xiv4 The employer failing to deduct or after deduction failing t pay to Bovernment will be considered to be dealer in arrears and other provisions of "ct will apply to him accordingly, including interest! xv4 xvi4 The T>S amount should be paid within 03 days of the month in which T>S is deducted! The employer should issue T>S certificate to the contractor! The T>S certificate should be in form 83- and be issued after payment of T>S is made in Bovernment Treasury! xvii4 The employer should send statement in duplicate in form 83/ to the registration authority of contractor! Though 7ule 83 ,04 ,c4 provides for monthly statement, by *ircular Fo! 1T of -33C dated 0/!C!-33C, it is clarified that the said statement may be send on 5uarterly basis! xviii4 838! !4# INTER,STATE NATURE OF WORKS CONTRACT $ USE OF C FORMS The law regarding Hsale in course of inter'state trade or in course of importH in relation to wor)s contract is rather complex! "s stated earlier the Supreme *ourt has ruled that the principles of sale ta)ing place in course of inter'state trade or import are e5ually applicable to deemed sales under wor)s contracts! %owever, as and when such sale will be deemed to have ta)en place, is difficult tas) to decide! Still from the discussions in various $udgments it can be said that, when the goods are specifically mentioned in the contract, which are moved from one state to other state, and if such goods are The employer should maintain register of T>S in &orm from end

' 2* ' installed or used in the same form in the execution of

contract, it can be said that the sale of such goods is in course of inter'state trade! Similar position will apply in the case of goods imported from outside the country! En the other hand if the goods are re5uired to be manufactured or fabricated on the site, where only raw materials are imported or moved from other state, there is no movement of such finished goods from one state to another pursuant to contract of sale in execution of wor)s contract, and hence deemed sale of fabricated goods used in the (or)s *ontract cannot be said to be in the course of inter'state trade! It will therefore be a local sale within state where the contract is being executed! It is pertinent to note that if the sale under wor)s contract is proved to be in course of inter'state trade or in course of import, no tax will be attracted on the same as the HsaleH under *ST "ct did not include the (or)s *ontract till its amendment which is effective from 00!C!-33-! &or example, if an assessee had ta)en a contract in +aharashtra where the specified goods to be used in (or)s *ontract are to be manufactured at its branch in Bu$arat, the movement of the manufactured goods from Bu$arat will be in course of inter' state trade and hence the value of such goods cannot be taxed in the State of +aharashtra! It will not be taxable in Bu$arat either as HsaleH under *!S!T! "ct did not include sale under (or)s *ontract En till the amendment other hand, which if is effective of from moving 00!C!-33-! instead

manufactured goods from Bu$arat, only raw materials are moved and finished goods are fabricated or manufactured on the site in +aharashtra, such sale will be considered as local sale and it will be taxable in +aharashtra under ="T "ct! >epending upon facts of the case, the contractor could minimiGe his liability under (or)s *ontract by using above theory of inter' state (or)s *ontract! If the sale under (or)s *ontract proved

' 2' ' to be in course of import then it remains immune from tax altogether! %osition from 11.'.2002 &rom 00!C!-33-, the definition of sale under *entral Sales Tax "ct stands amended and the transactions of (or)s *ontract are now taxable under *entral Sales Tax "ct! Therefore the exemption which was available to inter'state (or)s *ontracts is now not available! In other words, if the movement of goods to other state is proved to be due to sale under (or)s *ontract, the same will be considered as sale under *entral

Sales Tax "ct and the said goods will be liable to tax in the state from where they are moved! Ef course, no liability on same goods can arise in the state where contract is executed since (or)s it will be considered stated as inter'state whether purchase under is *ontract! "s above the movement

pursuant to (or)s *ontract will depend upon facts of each case, i!e! whether movement is of finished goods for contract or raw materials! of The liability goods under and can not arise in in relation to to raw movement in course finished of import relation still

materials! It may be mentioned here that the position of sale (or)s *ontract remains privileged, in the sense no tax can still be attracted on the same, being protected by article -91 of *onstitution! It is now necessary that, well defined elaborate contract is entered into to bring clarity to tax liability! It is possible that the litigation may increase in particular case, since both the states i!e! the state from where goods are moved as well the state in which the contract is executed, may try to levy tax on same goods, one under *entral Sales Tax "ct and the other under Local "ct! *larification by legal fiction by *entral Bovernment is more desirable! 8al,e on #hi h Central Sales 9a; %aya)le The other issue is about the value on which tax is payable under *entral Sales Tax "ct! Since the tax is payable under

' 2! ' *entral Sales Tax "ct when no specific provision is made for composition scheme, the tax will be payable on the value goods involved in the contract! The composition of scheme,

operative under various Local "cts will not be applicable to transactions under *entral Sales Tax "ct! @y amendment of -33C in sale price provided for a standard deduction scheme is sought to be at the taxable portion! %owever in arriving

absence of 7ule it is still not operative! "t present, the value is to be determined in light of $udgment of %on! Supreme *ourt in case of Bannon >un)erley ; *o!,99 ST* -384! 2ate of ta; The other issue is about rate of tax! The rate of tax will be 8M or lower ,if the general rate of tax is lower than 8M in the appropriate State4 if supported by *#> forms! If not so supported, then 03M or if local rate of tax is higher then 03M, such higher rate, as applicable in appropriate state, will apply! In case of >eclared goods such rate will be double the local rate! exempt It is needless local to add the that said if goods will are be generally under "ct, goods

exempt under *ST "ct also! Then the rates are to be decided alongwith rates under ="T "ct,-33-! "s mentioned above, when raw materials are transferred to other state, where after necessary fabrication etc! the goods are used in (or)s *ontract, the transaction will be covered under Local "ct! %owever since there is transfer of goods from one state to other, in light of amended provisions of section 1" of *ST "ct, the state authorities from where the raw materials are transferred may insist for &orm &! Though the law as stands today such & form is re5uired, the issue needs to be clarified by the *entral Bovernment, rest it will cause many hardships as also unwarranted litigation! Thus, in light of amendment in definition various issues are arising! The *entral Bovernment should decide them at the earliest to bring clarity and simplicity!

' 2( '

USE OF 5C5 FORMS "s discussed above definition of HsaleH under *!S!T!"ct,0.C1 does not include sale under wor)s contract till 00!C!-33- and hence in strict of goods by sense for *ircular the use H*H in &orms wor)s of 0..cannot contract! dated be used for in the purchase %owever, -9!-!.-

+aharashtra

Fo!/

*ommissioner of Sales Tax administratively allowed use of H*H &orms, where the sale under the wor)s contract was liable to tax in +aharashtra! %owever after amendment in definition of sale the dealer can use * "ct! CONCLUSION The topics relating to tax legislations are evergreen topics as day'to'day to and new the developments :rovisions, case can be is a go there "lso uni5ue down for on! are in case any In the addition due of the of field and )ind to to tax tax tax amendments $udgments legislation standard changes in *entral Sales Tax "ct from 00!C!-33-, it can be said that now form for effecting purchases of goods for use in (or)s contract as per law under *entral Sales Tax

interpretations!

each

implications depend on facts of the said case! Therefore no theory laid implications! The above note is with a intention to study few tax implications! I hope participants will find above note useful in their day'to'day practice while dealing with the sub$ect of sales tax implications on immovable properties and *ontracts! I wish a grand success to the seminar!