The Bombay High Court vide its judgment dated 30-4-2015 dismissed four Writ Petitions challenging the constitutional validity and propriety of Notification No.VAT.1513/CR-147/Taxation-1 dated 29-1-2014 issued by the Government of Maharashtra for amending MVAT Rule 58 and of Trade Circular No. 7T of 21-2-2014 and 12T of 17-4-2014 issued by the Commissioner of Sales Tax, Maharashtra. The judgment is reported in 82VST155(Bom).
The aforesaid dismissal will have no effect in case of agreements registered on or after 1-4-2010 on which a developer is paying composition @ 1%.
In case of agreements registered prior to 1-4-2010 where a developer cannot pay composition @ 1%, the question is, what step should be taken in case of assessment order passed by working out the sale price as per amended Rule 58.
In other words, after the aforesaid judgment, the question is, whether non workability of Rule 58 cannot be established in assessment/appeal/DDQ proceeding?
In my opinion, looking to below mentioned observation and decision of the Court, non workability can be established by giving proper evidence.
“Whether any further deductions can be claimed beyond those already mentioned, may depend on the nature of claims in the case of a particular assessee adducing evidence in a proper case and at proper stage. In such cases, it will be for the revenue to determine on the evidence before it and what should be the cost to be taken as value of subject of tax for the purpose of MVAT.”
“For all aforesaid reasons, we are not in agreement with the petitioners. We are not impressed by the submissions made on behalf of the petitioners that valuation of goods under Rule 58 of the MVAT Rules would not let the proper authority to probe into transactions of land dealings by the developers, depending upon facts and circumstances of and evidence in particular case, as it would be open for the competent authority to make proper inquiry and seek details of the transactions and the price at which the property had been purchased.”
“Investigation and inquiries incidental to valuation assessment and the recovery of tax are not precluded or prohibited under the scheme of the rules and there need not be any specific provision for the same, however, with a rider that said investigation or inquiry would not be necessary on vague and general grievances.”
“In the process, in some cases, if there is any over payment of tax, the provision makes allowance for its refund and would not tantamount to tax on land. Legislature does not intend to levy tax on matters other than as are intended under the enactment. Even in case of undervaluation, after determination, till such time overpayment would be towards the tax on goods so long as land value is not revalued and it would continue to tax on goods up to this time, its nature being MVAT over and in excess on taxable value. Only on redetermination, in a particular case if amount is to be refunded, it cannot be said to be bad for being tax on land.”
All the above observations makes it clear that if a developer furnish proper working of value of goods transferred and services rendered, before and after the contract is entered into, the Assessing Officer is empowered to accept such working and levy tax accordingly.
After going through the entire judgment, it can be said that the challenge to amended Rule 58 and Trade Circulars and the submissions of the Petitioners has theoretical/principle base and not the actual base to establish that the actual value of goods transferred for the entire project is much lower than prescribed by sub-rule(1B) of Rule 58. Therefore the High Court has observed that “Investigation and inquiries incidental to valuation assessment and the recovery of tax are not precluded or prohibited under the scheme of the rules and there need not be any specific provision for the same, however, with a rider that said investigation or inquiry would not be necessary on vague and general grievances.”
As far as the valuation of land is concerned, nothing beyond prescribed by sub-rule(1A) of Rule 58 can be done now. However after deducting the consideration towards land, a developer should produce before the lower authorities the working of the entire project after its completion, for the Assessing Officer to determine/allocate the consideration for sale of goods and for rendering of services. This is possible in case of most of the projects which were commenced before 20-6-2006 and are now completed for which the assessments are in progress. In such cases, it can be very well established that the actual value of goods transferred for the entire project is much lower than prescribed by sub-rule(1B) of Rule 58.
In view of the above, I am of the firm opinion that Special Leave Petition should not be made before the Supreme Court. Instead, it is advisable to approach the High Court, after the lower authorities including the Tribunal, turn down the submissions of a developer that as the actual value of goods transferred for the entire project is much lower than prescribed by sub-rule(1B) of Rule 58, the value as per aforesaid rule be ignored and tax be levied on taxable turnover of sale of goods worked out on actual.
Under the circumstance, it is advisable to produce before the lower authorities,
a working for the entire project, as shown
below:
A: Break up of consideration received or receivable (Date & Amount received for each flat):
(i) Consideration received or receivable for each flat sold and break up of before and after the contract is entered into;
(ii) Consideration received or receivable for each flat sold as immovable property;
(iii) Consideration that may be received for unsold flats.
B: Total square feet area of flats sold, sold as immovable property and remained unsold.
C: Purchases of goods for the entire project (Date & amount paid for each purchase with break up of rate of tax paid on each purchase). After the purchases of goods for the entire project are accounted and taken into account, the working as shown below:
(i) Actual/Proportionate quantity and value of goods transferred before the agreement for sale of each under construction flat is entered into;
(ii) Actual/Proportionate quantity and value of goods transferred after the agreement for sale of each under construction flat is entered into;
(iii) Actual/Proportionate quantity and value of goods transferred for the construction of each flat sold as immovable property i.e. after obtaining Completion Certificate/Occupation Certificate;
(iv) Actual/Proportionate quantity and value of goods transferred for the construction of each flat remained unsold.
Note: (i) As the computation of actual quantity and value of goods transferred to each purchaser is not possible (except in case of specific goods used for a particular flat), the proportionate quantity and value depending on square feet area be worked out for each flat sold, sold as immovable property and remained unsold.
(ii) It is also not possible to ascertain the value of goods transferred for the construction of common area/facilities and for flats given free to existing tenants, landlord etc. Even otherwise, the quantity and value of material for the above construction shall be proportionately allocated to each flat sold, sold as immovable property and remained unsold depending on square feet area of such flats. This is because, the said cost is being recovered from the flats sold, sold as immovable property and remained unsold depending on square feet area of such flats.
D: After the above working is produced before the lower authorities, the picture would be as follows:
| 1 | Consideration pertaining to construction completed before, the developer enters into a contract with the flat purchaser.(As per Para 115 of L & T’s case, such consideration is neither for ‘sale’ within the meaning of Section 2(24)(b)(ii) of the MVAT Act nor for taxable service.) | Consideration pertaining to construction to be carried out after, the developer enters into a contract with the flat purchaser. (As per Para 115 of L & T’s case, such consideration is for ‘sale’ within the meaning of Section 2(24)(b)(ii) of the MVAT Act and for taxable service.) | Consideration pertaining to construction of flats sold as immovable property and that may be received for flats remained unsold, which is neither for ‘sale’ within the meaning of Section 2(24)(b)(ii) of the MVAT Act nor for taxable service. |
| 2 | Less: Proportionate value of Land for the above.(Kindly note that even if land is acquired by a developer by way of gift/ancestral or by way of development right, it is to be presumed that the total consideration charged to buyer includes the consideration for transferring the proportionate interest in the land.) | Less: Proportionate value of Land for the above. (Kindly note that even if land is acquired by a developer by way of gift/ancestral or by way of development right, it is to be presumed that the total consideration charged to buyer includes the consideration for transferring the proportionate interest in the land.) | Less: Proportionate value of Land for the above. (Kindly note that even if land is acquired by a developer by way of gift/ancestral or by way of development right, it is to be presumed that the total consideration charged to buyer includes the consideration for transferring the proportionate interest in the land.) |
| 3 | Less: Actual/Proportionate value of services rendered for the above. | Less: Actual/Proportionate value of services rendered for the above. | Less: Actual/Proportionate value of services rendered for the above. |
| 4 | Balance Taxable under VAT: Actual/Proportionate value of goods transferred for the above.(This shall be taxed @ 5%, 12.5% etc. The tax rate wise break up of goods purchased for the entire project shall be applied.) | Balance not Taxable under VAT: Actual/Proportionate value of goods transferred for the above. | Balance not Taxable under VAT: Actual/Proportionate value of goods transferred for the above. |
In fact the allocation of remaining consideration i.e. as shown in 3 & 4 above for services and goods is impossible for a developer, lower authorities, as well as to any High Court and Supreme Court. Therefore 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 works 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 works 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.
In view of the above, the difficulty/impossibility in filling up the value at 3 & 4 of the above ‘Table’ by assessing authority can be established/shown/pleaded as non workability of Rule 58.
Moreover, unless the entire project is completed, the proportionate working of goods transferred to a flat buyer is not at all possible. This means, the taxable event though occur at the time of actual transfer/accession/accrual of goods, it will have to be postponed/deferred, till the value of entire purchase of goods is available. Even if sub-rule (1B) is accepted by a developer, the value of goods cannot be taxed @ 5%, 12.5% etc. unless entire project is completed.
In this regard the judgment of High Court of Uttarakhand decided on 10/04/2014 in the case of Valley Hotel & Resorts vs. The Commissioner, Commercial Tax, Dehradun is also 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.”
In view of the aforesaid decision, the value at 3 of the above ‘Table’ should be as per Service Tax Valuation Rules and balance amount only should be made liable to VAT.
Even if the proviso to sub-rule (1B) of Rule 58 is inserted on the lines of Rule 59, the taxable event in case of each and every installment of consideration due to a developer will have to be postponed till the project gets completed. In the alternative, the developer at the first instance may be forced to pay tax as worked out by sub-rule (1B) of Rule 58 and after assessment of the entire project is completed, the refund of the excess tax paid may be granted.
If the developers remain silent, in view of lucrative rate of composition @ 1%, they should not forget that the Government of Maharashtra has power to increase the aforesaid rate on one fine morning, merely by issuing a
Notification i.e. without going to Legislative Assembly.
Therefore in order to have legitimate sub-rule (1B) of Rule 58 (rather entire Rule 58), the deduction for consideration towards services in case of every works contract (not only of development) shall be as per Service Tax Valuation Rules, and only on remaining consideration, VAT shall be levied.
Summing up
In support of my opinion that a developer should approach the Supreme Court at latter stage, the judgment of the Supreme Court in case of Damodarasamy Naidu & Bros. (117 STC 1) be taken into account. The hoteliers from various States including the State of Maharashtra approached the Supreme Court after assessment, with the issue of determination of taxable turnover of sales for the purpose of levy of sales tax on food element in case of residential hotels charging composite sum for lodging and boarding. It was held “composite charges recovered by residential hotel providing boarding and lodging could not be bifurcated, unless rules were framed by the 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 the 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, “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 the proviso like the one provided under Rule 59 is not made under sub-rule (1B) of Rule 58. Therefore, if the developer establish that the actual value of goods transferred for the entire project is much lower than prescribed by sub-rule (1B) of Rule 58, the High Court or Supreme Court may direct the Government of Maharashtra to insert such proviso retrospectively.