1. Value Added Tax on the sale of goods is being levied by every State in India vide separate enactment called Value Added Tax Act. The Parliament introduced the levy of Service Tax in 1994 under Chapter V of the Finance Act, 1994. As there is no separate enactment for the levy of Service Tax, the term ‘Service Tax Act’ is used in this write up for convenience. Similarly the term ‘contractor’ is used for works contractor as well as for service provider.

2. The Supreme Court of India in the case of Larsen & Toubro Ltd. (hereinafter mentioned as L & T) reported in 65 VST 1 held that a single contract may cover deemed sale of goods as well as rendering of service. Therefore, once again the question is, whether the contractor is liable to pay VAT as well as Service Tax on the consideration received for the same contract? If the answer is in the affirmative, then it would amount to double taxation or as the case may be overlapping in VAT and Service Tax. The Courts have taken the view that where the tax is levied by two different Governments it is not double taxation.

3. As far as the contractors are concerned they will continue to expect and that is logical as well, that even small portion of the same consideration should not be taxed twice i.e. under VAT Act as well as under Service Tax Act. Though both the enactments provides deductions/abetment for the consideration received for another, there is no machinery in both these enactments to assure that the portion of the consideration taxed under VAT Act will not be taxed under Service Tax Act or vice versa. The power to determine the ‘taxable amount’ out of total consideration, for the purpose of levy of VAT and Service Tax is conferred respectively on the Legislature of a relevant State and on the Parliament. The provision to determine the ‘taxable amount’ is so made under both the enactments, that same portion of the consideration is being taxed under VAT Act as well as under Service Tax Act. Even after deducting the abatements offered under the respective enactment, the consideration taxed under both the enactments is more than what is actually received by the contractor. This for all practical purposes amounts to overlapping in Service Tax and VAT.

4. In Para 92 of L & T’s case it is observed
“It seems to us (and that is the view taken in some of the decisions) that a contract may involve both a contract of work and labour and a contract of sale of goods. In our opinion, the distinction between contract for sale of goods and contract for work (or service) has almost diminished in the matters of composite contract involving both (a contract of work/labour and a contract for sale for the purposes of Article 366(29-A)(b). Now by legal fiction under Article 366(29-A)(b), it is permissible to make such contract divisible by separating the transfer of property in goods as goods or in some other form from the contract of work and labour. A transfer of property in goods under clause 29(A)(b) of Article 366 is deemed to be a sale of 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. For this reason, the traditional decisions which hold that the substance of the contract must be seen have lost their significance. What was viewed traditionally has to be now understood in light of the philosophy of Article 366(29-A)”.

5. In view of the aforesaid observations of Supreme Court, all the judgments prior to L & T, will have to be analysed from new angle. The dictionary meaning of the word ‘overlap’ is “to occupy the same area in part” or “to have parts that are the same as parts of something else”. Therefore while working out the sale price for the purpose of vat, if the price for services is also included in it, it would amount to overlapping in vat.

6. Although in the case of L & T, the Supreme Court was concerned with the levy of vat on developers, its observations in Para 115 will lead to controversy regarding the value to be determined for vat and service tax both. It is observed
“the 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.” Therefore the question is as to whether prior to aforesaid stage, was it a ‘works contract service’? If it is not, then even service tax cannot be levied prior to aforesaid stage, on the consideration received till the aforesaid stage.

7. In view of the aforesaid controversy, the litigation regarding the ‘taxable amount’ under VAT Act has already commenced
vide four Writ Petitions filed in the Bombay High Court by the Association of Builders and Others. Now the litigation regarding the ‘taxable amount’ under Service Tax Act may commence on the ground that the consideration pertaining to construction prior to the stage the developer enters into a contract with the flat purchaser, cannot be made liable to service tax. Looking to newly amended Rule 58 under the Maharashtra Valued Tax Act the key point for determination of sale price (taxable amount), may be of enforceability. Though in past the courts have taken the view that the enforceability test is not determinative or hurdle in levy of VAT or Service tax, in view of criteria laid down by the Supreme Court in L & T’s case, the courts are expected to entertain the issue of working out the ‘taxable amount’ and of overlapping in Vat and Service Tax.

8. Though in number of cases, the power of the respective government to determine the ‘taxable amount’ in case of composite contract is upheld, in none of the case, concrete ruling has been made to determine ‘taxable amount’ for the purpose of levy of Vat and Service Tax, out of ‘total amount’ received or receivable by the contractor, in such a manner, that even a small portion will not be subject to both the levy. As the courts must have realised the difficulty (rather impossibility) to determine the legitimate ‘taxable amount’ for both the enactments, it left the said issue open, to law makers, assessing authorities and contractors. The judgment in the case of BSNL is landmark in case of taxation of composite contracts. Even then, the Supreme Court left the issue of determination of taxable amount for the levy of vat on SIM card to the assessing authority. Therefore the dispute regarding determination of ‘taxable amount’ under both the enactments will continue in future as well. Under the circumstance it is worth noting the observation of Supreme Court in the case of
C. K. Jidheesh & Co. [144 STC 322(SC)] that “this court has in the case of Rainbow Colour Lab held that contracts of the type entered into persons like the petitioner are nothing else but service contracts pure and simple. It is held that in such contracts there is no element of sale of goods. This judgment is binding on this court. In view of this judgment, the question of directing the respondent to bifurcate the receipts into an element of goods and the element of service cannot and does not arise. We see no substance in the contention that facts in Rainbow Colour Lab’s case were different in as much as in that case the court was dealing with a case where photographers take photographs, develop them and then give the photos to the customer. In our view, the ratio of Rainbow Colour Lab’s case also applies to cases like the present.”

9. Though in case of L & T, the Supreme Court was concerned with the levy of sales tax in development contracts, the ruling laid down by it, regarding the measure for determination of value of goods transferred will also apply to other composite contracts involving goods and services. The Supreme Court ruled that the measure for the levy of tax has to be the value of the goods at the time of incorporation of the goods in works and not the cost of acquisition of the goods by the contractor. 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. The mode of valuation of goods provided in Rule 58(1A) has to be read in the manner that meets this criteria. (Emphasis supplied) Accordingly, the State of Maharashtra was instructed to amend Vat Rule for determination of sale price of goods involved in the execution of works contract in order to meet the aforesaid criteria.

10. Thereafter i.e. on 31-1-2014, the SLP of Builders Association of India against the judgment and order of the Bombay High Court in Writ Petition No.2440 of 2012 decided on 30-10-2012 came up before the Supreme Court for hearing. The Government of Maharashtra informed the Court that, in order to give effect to the judgment in L & T’, it has amended entire Rule 58 w.e.f. 20-6-2006,
vide Notification No.VAT.1513/CR-147/Taxation-1 dated 29-1-2014 and submitted that the controversy in the SLP stands concluded by the decision in L & T’s case. The Supreme Court, without giving chance to Developers to point out as to how the amended Rule 58 does not satisfy the said criteria, disposed the said SLPs vide its order dated 31-1-2014 in the words
“we are satisfied that the controversy in the present Leave Petitions is concluded by the decision of this Court in L & T. We accordingly, dispose of the SLP in term of that Decision. It is, however, clarified that if the Petitioners have any grievance about the notification dated 29-1-2014, they may per sue their remedy in that regard. We further clarify that if the Petitioners file revised returns in terms of this order and/or notification dated 29-1-2014, such returns will be examined by the concerned assessing officer appropriately in accordance with law.”

11. Whether the Law i.e. Rule 58 which defines ‘sale price’ for all kinds of sales, is in consonance with sub-section (25) of Section 2 of the Maharashtra VAT Act? To find the answer, it is required to take into account, that in case of all kinds of “sales”, tax is payable on the “sale price” determined by Section 2(25). The said sub-section does not provide that, the sale price in case of composite contracts shall be determined, as prescribed. Therefore, it can be submitted that, the State Government has no power under section 2(25) or under the charging section to prescribe Rule for determination of “sale price” for composite contracts. In spite of the above, right from the inception of the MVAT Act, Rules 58 and 59 have been prescribed, to determine the “sale price” of goods, respectively in case of works contracts and in case of residential hotels charging a composite sum for lodging and boarding. In the absence of such power it can be submitted that the existence of Rules 58 and 59 is in doubt. Under the circumstance, whether the dealers should work out the sale price of such goods as per section 2(25) or as per Rules 58 and 59 or as per criteria laid down by the Supreme Court in L & T’s case? The issue that the Government of Maharashtra has no power under section 2(25) of the MVAT Act to prescribe Rule 58 or as the case may be Rule 59 was neither raised by the developers before the Supreme Court in L & T’s case nor by the hoteliers in any other case. In case of developers, it was only pointed out that Rule 58 is not giving proper results, so as to exclude price for non sale elements. Moreover, Rule 58 contains the words “value at the time of transfer, may be determined, by effecting the following deductions from the value of the entire contract”. The point to be noted is that, in the aforesaid rule, the word “may” is used and not “shall”. Therefore it can be submitted that, there is no statutory obligation on the contractor to work out the sale price as per Rule 58 and the contractor can determine the same by resorting to any other method also.

12. Assuming, the Government of Maharashtra has power to prescribe Rule 58 or as the case may be Rule 59, the contractors should make an attempt to segregate (determine) consideration, for sale of goods involved, in the composite contracts shown below:

1. Deemed Sales (Works contract/Transfer of right to use goods);

2. Sale having negligible element of service;

3. Service having negligible element of goods;

4. Supply of food by residential hotels for composite price.

13. In the case of Matushri Textiles Ltd. (132 STC 539 Bom), in view of ACC’s case of Supreme Court, it was held, “even where the contract involves negligible amount of transfer of property in goods, it would amount to works contract irrespective of whether the transfer of property in those goods is incidental or otherwise.” Therefore, in number of decisions after Matushri Textiles Ltd., even service contracts have been held as works contracts. In case of Matushri, as the main issue was whether the activity involved is works contract or not, the issue regarding the computation of sale price in case of such works contracts was not raised before the Bombay High Court. Therefore in case of contracts involving negligible value of material, the issue of determination of sale price is open on the ground of non workability. In Matushri’s case, the Bombay High Court held that its decision in the case of
RMDC Press Pvt. Ltd. (112 STC 307 Bom.) regarding ink used in job work of printing, is per incuriam. Therefore the Writ Petition was filed to Bombay High Court by Maharashtra Mudran Parishad against its decision to hold RMDC Press Pvt Ltd’s decision per incuriam. The issue of non workability of sale price of ink involved was also raised in it. However the Bombay High Court held that the assessing authority should decide the dominant object and the nature of contract in each case on its own fact. It is reported in 139 STC 193(Bom.). The SLP before the Supreme Court against the aforesaid decision is pending. Under the circumstance and in order to find out as to whether working out sale price is possible as per provisions made in the VAT Act of each State, it is appropriate to start with the State of Maharashtra by examining Rule 58, which is complicated and non workable for computation of taxable amount, in case of all kinds of works contracts.

14. Bare reading of Rule 58 reveals as follows:

(A) Value of goods at the time of its transfer may be determined:

1. By effecting deductions mentioned in clauses (a) to (h) of sub-rule (1), from the entire contract value,
   
   or
   by effecting deductions as per proviso to sub-rule (1) from the entire contract value @ 30% as per ‘Table’ appended;

2. If the Developer opt for deduction @ 30% shown above, the ‘Note’ below the ‘Table’ clarify that the said percentage is to be applied after deducting from the total contract price:

   1. the cost of land determined under sub-rule (1A);

   2. the quantum of price on which tax is paid by the sub-contractor if any;

   3. the quantum of tax separately charged by the Developer if the contract provides for separate charging of tax;

3. The value so arrived at is not the value of goods involved in the sale of flat; but it shall be determined by applying the percentage provided in the ‘Table’ appended to sub-rule (1B)(a);

4. The amount determined as per sub-rule (1B)(a) is the ‘sale price liable to tax’ for the sale of flat and;

It will be liable to tax as per rate specified in the relevant entry of the ‘schedule’ read with notification if any.

15. Working of “sale price” and “tax amount” in case of works contracts as per Rule 58 is summarised in the following ‘Table’.

‘Table’

16. The computation shown in the ‘Table’ looks very simple, because prescribed percentage for labour, service charges etc. is taken into account. But to determine the actual value for labour, service charges etc. as per clauses (a) to (h) of Rule 58(1) is not only difficult, but next to impossible. Moreover clauses (a) to (h) of Rule 58(1) does not include all the service elements. The contracts where service element is very high and goods element is negligible, the “sale price” worked out as per Rule 58 will be very high, than the actual value of goods transferred even after value addition as held in case of L & T.

17. In case of Developers, the computation of “sale price” and “tax amount” for sale of each flat is very difficult especially on the background of Supreme Court’s observation in L & T, 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. For this purpose the total consideration is required to be segregated in two parts. (i) Consideration pertaining to construction completed till the stage, the developer enters into a contract with the flat purchaser and (ii) Consideration pertaining to construction to be carried out from the stage, the developer enters into a contract with the flat purchaser.

18. The consideration covered under (i) will neither attract vat nor service tax, because, till then, it was neither works contract nor works contract service. The consideration covered under (ii) will have to be segregated in two parts viz. Vat & Service Tax.

19. Before going into aspect of overlapping as per working made by this Rule, it can be pointed out that this Rule does not provide deduction for consideration pertaining to construction completed till the stage, the developer enters into a contract with the flat purchaser. In the absence of such provision the question is whether the contractor should exclude such amount of consideration from the total contract value? The answer to above should be in the affirmative.

20. After the consideration covered under (i) is excluded, legitimately and logically, the segregation of the remaining consideration should be as follows.

21. The question is who will ascertain the value for ‘X’ as well as for ‘Y’. If we analyse the provisions under both the enactments, we find that the ‘X’ + ‘Y’= more than 100. This excess amount is overlapping. Once there is such overlapping, whether consideration determined under Vat Act overlaps the consideration determined under Service Tax Act or vise versa is only of academic interest. In such case the important issue is to find out a legal solution to avoid overlapping. However the contractors are helpless and the law makers of the Union Government and of the States are not taking any efforts to avoid overlapping. In fact once a consideration for composite contract is disclosed by the contractor, the onus is on the respective Government to determine the correct value for taxation of Vat or as the case may be for Service Tax in order to avoid overlapping. Unfortunately the Rules for valuation under both the enactments are made in isolation and no authority is constituted to settle disputes of overlapping on the lines of Central Sales Tax Appellate Authority constituted u/s 19 of the Central Sales Tax Act, 1956.

22. The deduction for labour or service portion provided under Rule 58 at prescribed percentage, is much less than the percentage for levy of service tax prescribed as per Service Tax Rules 2A(ii) (A), (B), (C) which is respectively at 40%, 70% and 60% of total amount charged for the works contract. To be more specific when the levy of service tax is on the consideration arrived at 40%, 70% and 60%, then why Rule 58 provides for only 30% deduction for service portion in case of construction contracts and less than that in case of other contracts. As a result, in case of construction contract, after deducting 30% for services, vat will be payable on 70% value. As against the above, deduction for vat consideration available under service tax is 60%. This means there is overlapping of minimum 10% consideration.

23. Clause (c) of an Explanation provided to Service Tax Rule 2A(i) provides “where value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then such value adopted for the purpose of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract for determination of the value of service portion in the execution of works contract under this clause.” As against the above, neither section 2(25) of the MVAT Act nor Rule 58 provides deduction for actual value of services involved in the works contract. First of all in case of composite contract there is no provision under the MVAT Act to pay sales tax on actual value of goods. Even if the contractor proves the actual value of material transferred in the execution of the works contract (after considering value addition as held by Supreme Court in L & T’s case), Rule 58 does not allow him to pay sales tax on such actual value. Therefore the aforesaid Explanation under the Service Tax Rules is only decorative piece of legislation having academic importance.

24. Other issue of overlapping is regarding determination of taxable turnover of sales for the purpose of levy of vat on food element in case of residential hotels charging composite sum for lodging and boarding. In the case of
Damodarasamy Naidu & Bros. (117 STC 1 SC) it was held “composite charges recovered by residential hotel providing boarding and lodging could not be bifurcated, unless rules were framed by Government of Maharashtra in this behalf. Levy of Sales Tax on food and drink prior to 2nd February, 1983 in the State of Maharashtra was bad in law, as there was no such provision in the Sales Tax Act which could be validated by section 6 of the 46th Amendment Act.” In view of the aforesaid decision Rule 31A was prescribed under the Bombay Sales Tax Act 1959. The aforesaid provision is also made in Maharashtra Vat Act vide Rule 59 which prescribes a fixed percentage under various situations for determination of sale price for supply of food and non alcoholic drinks where the charges are composite. This percentage in many cases may be high. However this Rule has a proviso for reduction of the sale price. It provides “if the claimant dealer produces evidence to the satisfaction of the Commissioner that the component of the taxable turnover of sales in the composite sum is less than the percentage given above, the Commissioner shall reduce the above percentage to the extent of actual sum of turnover of sales so proved.”
It is important to note that such proviso is not made under Rule 58.

25. Regarding the above proviso it can be stated that it is merely an eye wash because it is not possible for any such hotel to produce such evidence. As the law makers are aware that to work out the sale price of food so supplied is not at all possible, the responsibility of computing the turnover of sales has been cast on the hotelier. At the cost of repetition it can be stated that once the amount of entire consideration is disclosed by the assessee, it is the responsibility of the respective Government to work out the taxable amount with concrete evidence. But who cares? They only know to enact, without looking into aspect of its non workability or as the case may be non enforceability. Whenever this issue was taken to Courts, the Courts (even the Supreme Court in case of L & T) avoided to give the decision on this regard and left the assessee at the mercy of assessing officer.

26. Therefore the issue of overlapping cannot be solved unless it is raised before the Courts again and again till the Supreme Court rules that any contract can be either of sale of goods or of rendering of service and domination intention is of great importance to decide whether the contract in hand is liable to tax under Vat Act or Service Tax Act. In case it is held that it is liable to tax under both these enactments, the submission again and again should be raised for the final ruling of the Supreme Court that the consideration taxed under one enactment shall not be taxed under the other and the Union Government shall define the sale price under both the enactments in such manner that the consideration taxed under one enactment shall not be taxed under the other. Till the expectation expressed hereinabove is fulfilled we have no option but to see in what best possible manner the sale price under Vat Act can be worked out as per respective provision and keep on representing before the respective Government to amend the Law to avoid overlapping.
In this regard the judgment of High Court of Uttarakhand decided on 10-4-2014 in the case of Valley Hotel & Resorts v. The Commissioner, Commercial Tax, Dehradun is worth noting. On 6-6-2012, the Government of India, Ministry of Finance(Department of Revenue) issued a Notification amending the Service Tax (Determination of Value) Rules, 2006 by introducing Service Tax (Determination of Value) Rules, 2012 by which 40% of billed value to the customer for supply of food or any other article of human consumption or any drink in restaurant, was made liable to Service Tax. Therefore an application for revision u/s 57 of the said Vat Act was filed to the Commissioner, Commercial Tax requesting not to charge VAT on 40% billed amount, as the same has already suffered service tax. The said application was rejected and the applicant moved the High Court against the said rejection. The High Court observed that “Value Added Tax can be imposed on sale of goods and not on service. Service can be taxed by Service Tax Laws. The authority competent to impose service tax has also assumed competence to declare what is service. The State has not challenged the same. Therefore, where element of service has been so declared and brought under the Service Tax vide the said Notification dated 6-6-2012 whereby 40% of the bill amount was made liable to service tax, no VAT can be imposed thereon.” Accordingly it was held “the Commissioner, Commercial Tax erred in rejecting the application of the revisionist. Thus, the revision is allowed. Judgments of Tribunal as well as of the Commissioner, Commercial Tax are set aside. The Commissioner, Commercial Tax is directed to pass order afresh in the light of above observations.”

27. To study the provisions under Value Added Tax Act of each State in order to find out the overlapping issues is not possible for constraint of space. Therefore the provisions under Andhra Pradesh and Tamil Nadu Act are discussed hereinafter in nutshell.

28. Under Andhra Pradesh Value Added Tax Act section 4 is the charging section. Sub-sections (7) and (8) thereof provides respectively for taxation of works contracts and contracts for transfer of right to use.

1. In case of works contracts, clause (a) of sub-section (7) to section 4 provides “every dealer executing works contract shall pay tax on the value of goods at the time of incorporation of such goods in the works executed at the rates applicable to the goods under the Act, provided that where accounts are not maintained to determine the correct value of goods at the time of incorporation, such dealers shall pay tax at the rate specified in Schedule V on the total consideration received or receivable subject to such deductions as may be prescribed.” Thus the responsibility to work out the value of such goods is cast on the contractor and if he is unable to work out the same, he is bound to pay tax on the total consideration after deductions as per rules prescribed. Accordingly Rule 17 has been prescribed for determination of value of such goods. Sub-clauses (d), (e) and (g) of sub-rule (1) of Rule 17 prescribed various methods; but there is no direct provision to exclude the portion of consideration from the levy of Vat on which Service Tax is levied. As such this Act also has the issue of overlapping.

2. In case of contracts for transfer of right to use, sub-section (8) to section 4 provides “every vat dealer who transfers the right to use goods taxable under the Act for any purpose whatsoever, whether or not for a specified period, to any lessee or licensee for cash, deferred payment or other valuable consideration, in the course of his business shall, on the total amount realised or realisable by him by way of payment in cash or otherwise on such transfer of right to use such goods from the lessee or licensee pay a tax for such goods at the rate specified in the Schedules.” These transactions are also liable to service tax. The sub-section (8) to Section 4 of Andhra Pradesh Vat Act also has the issue of overlapping because it does not have provision to exclude the portion of consideration from the levy of Vat on which Service Tax is levied.

29. Under Tamil Nadu Value Added Tax Act there are separate charging sections for levy tax on normal sales, levy of tax on right to use any goods and for levy of tax on transfer of goods involved in works contract. Moreover the term “taxable turnover” has been defined u/s. 2(38). As per aforesaid section “taxable turnover means the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total turnover and in such manner as may be prescribed.”

1. As per section 4 no deduction except for export in case of levy of tax on right to use any goods has been provided and hence vat is payable on the entire consideration.

2. Section 5(1) provides “Notwithstanding anything contained in this Act, but subject to the provisions of this Act, every dealer, shall pay, for each year, a tax on his taxable turnover, relating to his business of transfer of property in goods involved in the execution of works contract, either in the same form or some other form, which may be arrived at in such manner as may be prescribed, at such rates as specified in First Schedule.” Accordingly sub-rule (5) to Rule 8 has been prescribed to grant various deductions. Clause (d) thereof provides “all amounts towards labour charges and other charges not involving any transfer of property in goods, actually incurred in connection with the execution of works contract, or such amounts calculated at the rate specified in column (3) of the Table below, if they are not ascertainable from the books of account maintained and produced by a dealer before the assessing authority.

The Table

Comparing the aforesaid Rule with Rule 58 of the Maharashtra Vat Rule, it is far rational because it does not restrict the reductions on account of labour and other charges of a particular type. However the common problem of identifying the value of such labour is present in this rule also. Moreover the percentage prescribed for deduction is also arbitrary. Therefore this Act also is not free from the issue of overlapping.

30. On the above back ground different aspects of Rule 58 of the Maharashtra Vat Rules are explained hereinafter.

31. How to compute the value(turnover) of goods transferred in a particular period(Month/Quarter/Six Month):
In L & T case the Supreme Court held that “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. The mode of valuation of goods provided in Rule 58(1A) has to be read in the manner that meets this criteria.” Therefore it is clear that the tax is payable on the ‘value of goods’ and not on the entire consideration. As such computation of value of goods at the time of its transfer has great importance.

32. On which date Tax on sale of flat becomes payable: Tax becomes payable when the sale becomes complete or gets concluded. The Definition of “sale” u/s 2(24)(b)(ii) of the MVAT Act merely defines what is the meaning of “sale”. Section 6 of the MVAT Act is a charging section. It provides that sales tax shall be levied on the ‘turnover of sale’ of goods. The ‘turnover of sales’ means the aggregate of the amount of ‘sale price’ received and receivable in respect of any sale of goods made during a given period. In case of works contract ‘sale price’ will become due(receivable) after the sale gets complete by transfer of property in goods.

33. Taxable Event: In case of Project and Service Centre (82 STC 89 Guahati) it was observed “transfer of property is a common factor for a concluded sale of normal goods as well as in case of works contract. In case of normal sale, it gets concluded when delivery is taken from the transporter or when the documents are retired from bank. In case of works contract, sale would get concluded when the goods will be transferred in the execution of a works contract.” The Supreme Court in L & T case has approved this principal which was laid down by it in Gannon Dunkerley II in the words “since, the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works.”

34 Taxable Event in case of Construction Contracts:
In view of the above it can be said, that even in case of works contract of construction and sale of flat, the sales tax would become payable not at the time when the agreement is entered into or registered, but at the time when the transfer of property in goods involved in construction of flat takes place. Therefore the time (taxable event) to pay tax is, when after completion of part construction, the Developer demands the consideration from the flat purchaser. The date fixed in the agreement for payment of each installment (by the purchaser) after completion of each stage(plinth/floor etc.), is the time(event) for making payment of sales tax in case of goods involved for construction upto that stage. As such in case of sale of flat, the time for payment of a particular installment is generally fixed, after incorporation of goods i.e. after completion of particular stage such as plinth, floor etc. In support of the above the Supreme Court in L & T’s case in Para 124 seems to have held that “Taxing the sale of goods element in a works contract is permissible even after incorporation of goods”. Therefore it can be said that the amount of tax payable by the Developer in a particular period(Month/Quarter/Six Month) should be on the amount of installment or installments due in such period.

35. In short the percentage prescribed in sub-rule(1B) to Rule 58 to determine the value of goods involved is arbitrary and hence any other method worked out by the Developers should have been accepted after satisfaction of the Commissioner about its correctness.

36. The computation shown in the ‘Table’ looks very simple, but, while filing the return for a particular period(Month/Quarter/Six Month), following points will emerge in working out ‘sale price’ and ‘tax rate wise price of goods’ for levy of tax at different rate:

(i) Where the Developer wish to collect tax on the ‘sale of flat’ he shall issue Tax Invoice as per this ‘Table’.

(ii) Section 60(2) of the MVAT Act prohibits a Registered Dealer to collect any amount by way of tax in excess of the amount of tax payable by him. If he does so, he is liable to pay penalty u/s 29(10)(a) at Rs.2,000/-. In addition section 29(10)(b)provides that excess collection of tax shall be forfeited.

(iii) Above provision cast a responsibility on the Developer to collect exact amount of tax payable by him on the sale of flat. Moreover the flat buyer will not pay excess amount on account of tax.

(iv) Looking to Rule 58 it can be said that it is impossible for a Developer to collect exact amount of tax in order to save himself from the levy of penalty and forfeiture provided u/s 29(10). As such this Rule can be challenged on the ground of its non workability explained hereinafter.

(v) The proviso to sub-rule (1A) provides that after the payment of tax by deducting land cost as per sub-rule (1A), if the Developer proves before the Depart of town planning and valuation that the actual cost of land is higher than determined in accordance with the Annual Statement of Rates etc. the excess tax paid if any would be refunded.
In this regard it can be said that in such case, whether the Developer is allowed to keep the said amount of refund. Obviously the answer is in the negative because this would be treated as excess collection liable for forfeiture as explained hereinabove. In fact only the buyer of such flat is entitled to claim such refund. Moreover is their any Machinery provided under the MVAT Act for granting such flat wise refund to respective buyer. Instead, the criteria of prepayment of tax is required to be removed.

(vi) Computation shown in the ‘Table’ would be easy, if it is assumed that the project of construction is of a single bunglow and that too under assumption that the entire project is commenced and completed in a particular period (Month/Quarter/Six Month).

(vii) In construction activity, in each project, several flats are booked under constructions and then sold. The consideration received for flats sold as immovable property is required to be excluded as no tax is payable on such flats. Similarly, the consideration received in respect of completed sale before 20/06/2006, is also required to be excluded, as no tax is payable on such sale of flats. Other consideration received and due during a ‘Return Period’ will alone be determined as GTO. The (i) land cost,(ii) 30% element for labour, (iii) Price paid to Sub-contractor who is RD, should be as worked out in proportion to GTO of ‘Return Period’ and the total of (i),(ii), and (iii) is eligible for deduction from GTO.

(viii) The Balance as arrived above, will be subject to percentage as per Sr.No.(a) or (b) or (c) or (d) or (e) of ‘Table’ appended to clause(a) to sub-rule(1B) to Rule 58 and the amount arrived at by applying the said percentage shall be the value of goods liable to tax .

(ix) However the
difficulty is, during the ‘Return Period’, consideration received
may be for various agreements which were entered into at various
stages mentioned at Sr.No.(a) or (b) or (c) or (d) or (e) of ‘Table’ appended to clause(a) to sub-rule(1B) to Rule 58. The working for every flat sold is required to be done separately.

(x) The value as arrived after applying the relevant percentage mentioned above for every sale of flat, will be liable to tax at 0%,4%,5%,12.5% or at any other rate applicable to respective goods transferred during the ‘Return Period’.

(xi) However the difficulty is, during the ‘Return Period’, there may not be any purchase of material or the purchases may be only of particular goods liable to tax at different rate. Then how to collect tax at different rate applicable to goods transferred.

(xii) Even under presumption that the ratio of overall tax rate wise purchases required for the entire project shall be applied, then also, it is required to keep in mind that no Developer purchases entire material at the commencement stage; and therefore to determine ‘tax rate wise value of goods’ according to Rule 58 is not at all possible.

(xiii) Therefore it can be said that the value of goods liable to tax at different rate determined as per Rule 58 during a “Return Period” cannot be as per criteria laid by the Supreme Court in L & T case.

(xiv) In L & T case, the criteria laid down by the Supreme Court is that
“the value of the goods which can constitute the measure of the levy of tax, has to be the value of the goods at the time of incorporation of goods in the works”. In view of the above criteria, the Maharashtra Government was directed to bring clarity in Rule 58 in order to meet the said criteria. However after making an attempt to work out (as per amended Rule 58), it can be concluded that the value of goods in respect of each transaction of sale of flat, cannot be worked out tax rate wise and in view thereof the amended Rule 58 is not satisfying the said criteria.

(xv) Moreover, the condition in sub-rule(1B) to Rule 58 to furnish a Certificate from the local or planning Authority or RCC consultant is without taking into account the legal provisions under the respective Act and practice followed in the construction business.

(xvi) Instead, the proviso, on the lines of Rule 59 should have been inserted to sub-rule(1B) to Rule 58 to provide
“that if the Developer produces evidence to the satisfaction of the Commissioner that the value of goods at the time of incorporation is less than the percentage given in sub-rule(1B) to Rule 58, the Commissioner shall reduce the above percentage to the extent of actual sum of turnover of sales, so proved.”

(xvii) Moreover if the amendment to sub-rule (1) to Rule 58 is also carried out to provide deductions in addition to clauses (a) to (h) which are for other than goods element, then the value of goods so arrived at would be as per criteria laid down in L & T case.

37. The other issue of overlapping is whether vat is payable on service tax recovered on the transaction of composite contracts. The view taken by the Commissioner of Sales Tax Maharashtra State in case of Sujata Painters (DDQ-11-2007/Adm-3/16/B-1 dated 20-1-2012) is that service tax recoverable from the contractee is a cost separately charged before delivery of goods and therefore shall be included in sale price and vat thereon becomes payable. The above decision and other decisions on the above line have been challenged before the Tribunal and High Court. It can be submitted that, service tax is attracted only when the job is completed. Service tax is basically a tax to be levied after the contract is fully executed. As such service tax collection is in the nature of post sale/service and hence whatever is collected after the sale/service is complete, cannot become the part of contract value. It was held by the Supreme Court long back in the case of
Anand Swarup Mahesh Kumar(46 STC 477) “where a dealer is authorized by law to pass on any tax payable by him on a transaction of sale to the purchaser, such tax does not form part of the consideration for purpose of levy of tax on sales. Considering the above submissions and decision of Anand Swarup Mahesh Kumar, levy of vat on service tax will not survive.

38. Right from the inception of the Bombay Sales Tax Act, Octroi recovered from the purchaser is being added to ‘sale price’ liable to sales tax. Moreover under Octroi provision, the purchase price at the hands of the purchaser is being increased by the amount of sales tax paid to vendor and on the value so arrived at, octroi is being levied. Therefore the sale price under the Bombay Sales Tax Act cannot be treated as purchase price for the levy of octroi and vice versa. This is nothing but tax on tax. Looking to the ratio of Anand Swarup Mahesh Kumar, all decisions to add octroi in sale price for levy of sales tax and vice versa should not survive and are required to be challenged.

39. Summing up: Every one is optimistic that after the introduction of GST, overlapping will come to an end. Regretfully I state that the manner in which GST is being introduced, the issue of overlapping will not get solved. At the most under GST, the issue of overlapping in service tax and vat will get solved; but what about overlapping in other levy of taxes by Local Bodies? Why two parts of GST i.e. SGST & CGST are in pipe line? If this is done, there will be overlapping of assessment powers between Excise Department and Sales Tax Department and lakhs of assesses will continue to produce the books of accounts before both the departments. This is to maintain the autonomy of Government at Centre and at States so much so of Local Bodies, at the cost, time and energy of assesses. In order to abolish all other indirect taxes and subsume them in GST and also in order to have single GST Department by merging together the Excise and Sales Tax Departments, the continuous efforts by all the Associations of professionals are needed.

[Source : Article published in Souvenir of National Tax Conference held on 20th & 21st December, 2014 at Jaipur]

Deepak K. Bapat, Advocate