Validity of Rules for Builders under MVAT Act/Rules
Q. In the case of L&T Ltd. (65 VST 1)(SC), Hon. Supreme Court has confirmed the liability on Builders and developers. As a follow up, Maharashtra Government has amended Rules about builders. The effect is that if specified certificates etc. are made available the deduction towards land and immovable portion prior to agreement will be given, otherwise it will be restricted as given in the Rules. Therefore there are chances of services/labour/land portion getting taxed which is unauthorised. Whether such compulsory Rules are legal?
The reference is to the Rules which are amended/inserted in the MVAT Rules about builders/developers in pursuance of observations of Hon. Supreme Court in the above referred judgment. The said Rules are reproduced below for ready reference.
“58(1A) In case of construction contract, where along with the immovable property, the land or, as the case may be, interest in the land, underlying the immovable property is to be conveyed, and the property in the goods (whether as goods or in some other form) involved in the execution of the construction contract is also transferred to the purchaser such transfer is liable to tax under this rule. The value of the said goods at the time of the transfer shall be calculated after deduction of the cost of the land from the total agreement value. The cost of the land shall be determined in accordance with the guidelines appended to the Annual Statement of Rates prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995, as applicable on the 1st January of the year in which the agreement to sell the property is registered. Provided that, after payment of tax on the value of goods, determined as per this rule, it shall be open to the dealer to prove before the Department of Town Planning and Valuation of the actual cost of the land is higher than that determined in accordance with the Annual Statement of Rates (including guidelines) prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995. On such actual cost being proved to be higher than the Annual Statement of Rates, the actual cost of the land will be deducted and excess tax paid, if any, shall be refunded.”
“58 (1B) (a) Where the dealer undertakes the construction of flats, dwellings, buildings or premises and transfers them in pursuance of an agreement along with the land or interest underlying the land then, after deductions under sub-rules (1) and (1A) from the total contract prices, the value of the goods involved in the works contract shall be determined after applying the percentage provided in column (3) of the following table depending upon the stage at which the purchaser entered into contract.
Stage during which the developer enters into a contract with the purchaser
Amount to be determined as value of goods involved in works contract
Before issue of the Commencement Certificate
From the Commencement Certificate to the completion of plinth level
After the completion of plinth level to the completion of 100% of RCC framework
After the completion of 100% RCC framework to the Occupancy Certificate.
After the Occupancy Certificate
(b) For determining the value of goods as per the Table of clause (a), it shall be necessary for the dealer to furnish a certificate from the Local or Planning Authority certifying the date of completion of the stages referred above and where such authority does not have a procedure for providing such certificate then such certificate from a registered RCC consultant. (1C) If the dealer fails to establish the stage during which the agreement with the purchaser is entered, then the entire value of goods as determined after deductions under sub-rules (1) and (1A) from the value of the entire contract, shall be taxable. (2) The value of goods so arrived at under sub-rule (1), (1A) or, as the case may be, under sub-rule (1B) shall, for the purposes of levy of tax, be the sale price or, as the case may be, the purchase price relating to the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.”
It appears that due to above Rules there may be situation where in absence of required certificate etc. deduction will get restricted though actually it may be more. Therefore, such portion will get taxed.
The above issue was however contended before Hon’ble Bombay High Court. The validity of Rule was challenged. Hon. Bombay High Court has however upheld the validity of Rules. The relevant observation of Hon’ble Bombay High Court in Confederation of Real Estate Developers’ Association of India – Maharashtra & Others (Writ Petition No.4520 of 2014 & others dated 30-4-2015) can be referred as under:
“5. Grounds of challenge are that the impugned notification and the trade circulars are in express conflict with the observations of the Supreme Court in the case of
“Larsen and Toubro Limited v. State of Karnataka and Another” (2014) 1 SCC 708 and other pronouncements of this High Court and the Supreme Court. It is being submitted that amended Rule 58 fails to arrive at true and correct value of goods at the time of incorporation in the works contract and tends to indirectly tax immovable property along with goods. Though Rule 58(1A) makes allowance for deduction of cost of land, it compels determination in accordance with guidelines appended to Annual Statement of Rates, prepared under the provisions of Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 (Hereinafter referred to as Bombay TMV Rules, 1995), as would be applicable on 1st January of calendar year in which agreement of sale is to be registered, and as such, profit relatable to transfer of land would not be deductible from the total contract value. The amended Rule 58(1A) of the MVAT Rules also does not give allowance to deductions on account of consideration for acquisition of FSI / TDR, payments towards eviction of tenants, clearance of encroachment on land. While Rule 58(1)(h) permits deduction of profit relatable to supply of labour and service, amended rule does not provide for profit relatable to third element, namely, the land and the object of taxing of value of goods at the time of incorporation, as such, gets blurred. Trade Circular dated 21st February, 2014 restricts options to only one from the four methods given and no other option such as, ‘cost plus gross profit’ is admissible. Various other arguments have been advanced to contend that the Rule is deficient to provide for many things involved. Arguments are also advanced contending that Trade Circulars tend to be ambiguous and do not clarify many issues while they purport to answer the questions. According to the petitioners cost plus gross profit method is viable and practicable.
6. The petitioners further contend that Rule 58(1B) of the MVAT Rules, seeks to enact a wide and arbitrary categorisation. Stage wise percentage provided under Rule 58(1B) has no basis, either for stage or for percentage of construction. According to them, percentage of material on which taxes are sought to be levied is on higher side and it is unfair and unconstitutional. The percentage prescribed is not in tune with ground realities and technical considerations. According to the petitioners, though prescription of table has been modelled on recommendations of Public Works Department, the same is insufficient and would not be applicable to the cases of developers. There is huge difference in the contracts with the Public Works Department and the nature of work of the developer, viz., Public Works Department contract provides for escalation, which is not the case with the developer. It is further contended that presumptions underlying the table under Rule 58(1B) that work is done on site as per stage given, yet it would not necessarily represent the way construction is carried out, in stages and in the sequences, for, it may be combination of various stages or activities may be simultaneous and as such, the table would not be able to give correct determination of value of work done at the time of entering into an agreement.”
There were elaborate arguments, as well as deep consideration by Hon’ble Bombay High Court. Assuming that there may be some chances that valuation of goods may not be correct or some portion of immovable property may get taxed, the overall view of Hon’ble High Court is that the rules are for uniformity and hence cannot be said to be invalid or unconstitutional. Hon’ble High Court recorded its reasons, amongst others in following words:
62. This Court is to consider validity of provisions valuing taxable goods for the purpose of charging duty. While enacting a measure to serve as a standard as levy, the legislation may not contour it along with the lines which spell out the character of the levy itself. Viewed from this standpoint, it is not possible to accept the contention that because the levy of MVAT is a levy on transfer of goods in a works contract, the value of goods must be limited to cost plus profit. The broader based standard may be adopted and would be within authority and power of legislation. A standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of levy.
63. There is further consideration that the value shall be arrived at, assessed and ascertained on the modality as has been referred to under Rules 58(1)(1A) and (1B) of the MVAT Rules. The value is a measure of tax and Rule 58 provides for determination of value of goods to be arrived at after deductions therefrom, referred under the rules / formulae. Values and items as referred to under Rule 58(1), 58(1A) and 58(1B) are criteria for computing value of subject of tax at various stages as have been referred to under the Rules. Table under Rule 58(1B) specifies the stages and value at the stages. The computation of value is to be done in accordance with the terms of the same. It is intended to determine value of goods and provides basis for determining such value. The value has to be ascertained and determined in such a manner as is prescribed and shall be value of the subject of tax for the purpose of charging MVAT. The legislature, while enacting amended rules, did not intend to create a scheme materially different from the one in the previous Rule 58(1A) of the MVAT Rules. The object and purpose remained the same and so did original principle at the core of the scheme, and has been made more flexible and wider.
64. The first essential characteristic of MVAT is it is a tax on transfer of property in goods, secondly, uniformity of incidence is also a characteristic of the tax and thirdly the collection of tax. MVAT can be imposed on assessable value determined with reference to transfer of goods at the stage as referred to in the table. It is legislature’s power to legislate in respect of the basis for determining the measure of tax. The computation being made strictly in accordance with the express provisions under the rules, there is no warrant for confining the value as sought to be submitted by the assessee. It is open for the legislature to adopt any basis for determining the value of a taxable article. The measure for assessing the levy need not correspond completely to the nature of levy, and no fault can be found with the measure so long as it bears nexus with the charge. ……
67. The amended provisions define a measure of charge and the standard adopted by the legislature for determining value which may require / press for broader base than that on which the charging proceeds. By now, it is well settled that stage of collection need not in point of time synchronise with the transfer of property in goods for as is being a long standing position that in our country levy has status of Constitutional concept while the point of collection is to be located where the statute declares it. Taking into account this, the valuation of tax being made at the stages is a convenient mode for point of collection. It would not be necessarily confused with the nature of tax. Rule 58(1B) envisages a method of valuation of tax at the stages as have been referred to under the table for collection of the same. In order to overcome various difficulties, to have the value of taxable articles for the purpose of MVAT, the legislature or its delegate has prescribed table giving stages for the purpose of computation of value of subject of tax. This appears to have been provided in order to have uniformity and to avoid vagaries, disparity or inconvenience from case to case. The same has been incorporated after deliberation and consultation with concerned departments and would not be liable to be termed as arbitrary.”
Thus, the situation is now that the Rules will prevail. Unless the certificates as contemplated are brought no higher deduction will be possible. Though, it may get justified by the above judgment, there will be certainly injustice to the builders and developers, who were otherwise also under doldrums and also further burdened by way of interest etc. The only solution can be that the legislature should once again consider about giving practical procedure about above deductions.
C. B. Thakar