CS TALENT: June 2012

Impact of Hon. Bombay High Court Judgements

U/S. 48(5) of MVAT Act’ 2002

AND

Maharashtra Chamber of Housing Industry

Complied by: - By Dilip V. Parekh (Tax Consultant)

Recently Hon. Bombay High Court has delivered two Judgements on very hot burning issues, to allow input tax credit U/S. 48(5), and levy of tax on construction of buildings, dwelling units, premises. I have tried to annalyse both the Judgements and its implications.

(I) Judgement in case of Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur

1. Introduction

The MVAT Act’ 2002 was brought into force with effect from 1^st April’ 2005. Under the Maharashtra Value Added Act the tax shall be collected as every taxable sales separately and treated as output tax, similarly entitled to claim setoff / input tax credit on tax paid on Purchases / Expenses / Capital Asset allowable under Rule 52 subject to restriction under Rule 53 & 54. A dealer whose turnover of sales exceeds Rs. 5 Lacs or Rs. 1 Lacs as the case may be, shall be required to obtain registration under the MVAT Act. The tax shall be levied Under Section 6 of MVAT Act on turnover of sales of goods specified in Schedules B, C, D or E at the rates set out therein.

2. Recent trends of Sales Tax Department

Recently Sales Tax Department has issued letters along with notice in Form 603 to many dealers in the following instances:-

(i) Disallowance of set off / input tax credit mainly due to purchase from “Hawala Dealers”

(ii) Non-filing of returns by vendors.

(iii) Filed the return but short payment of tax by vendors.

(iv) Relevant data does not match either with J1 or J2.

Department rely on the affidavit furnished by the Hawala Dealer who has stating that during the course of investigation proceeding they have not sold any goods but issued only false sales invoice on which set off is claimed by the claimant dealer. The list of Hawala Dealers is available on Government web-site.

Therefore Department authority insist for reversal of set off claimed and direct to make payment with interest U/S. 30(2) and penal interest @25% of set off amount U/S. 30(4) of MVAT Act and to revise return accordingly. The main thrust is U/S. 48(5) r.w.s. 48(2) of MVAT Act provides that the set off should be granted only if the tax is actually paid in the Government Treasury.

Therefore it is necessary to understand the relevant provisions of MVAT Act.

3. Relevant provisions under MVAT Act

3.1 Definition of Sale Price in Section 2(25) & Explanation II

“Sale price” means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged.”

Explanation II - ‘inter alia stipulates that the “Sale Price” shall not include tax paid or payable to a seller in respect of such sale.

3.2 Section 16 contains a prohibition to the effect that an unregistered dealer can not collect tax from any other person. Moreover, a person or dealer who is registered is liable to pay tax during the period in which the registration certificate is effective; notwithstanding the fact that subsequently it is found that no registration certificate was necessary in his case.

3.3 Section 60 of the MVAT Act, 2002, stipulates that no person shall collect any sum by way of tax in respect of sales of any goods which are not taxable goods. A registered dealer is prohibited from collecting any amount by way of tax in excess of the tax payable by him on any sale of goods under the provisions of the Act.

3.4 Issuance of Tax Invoice U/S. 86 & Declaration U/R 77

The registered dealer is required to issue Tax Invoice under Section 86 r.w. rule 77 of MVAT Rules. Under the Scheme of the Act, every dealer is liable to pay tax on a sale transaction with a purchasing dealer. The dealer is also entitled to claim by way of a set off under section 48 the tax paid on his purchases as ITC.

Section 86 prescribes a tax invoice which is issued, by a selling dealer, indicating the amount of tax recovered. The tax invoice has to contain a certification as per rule 77 that the registration of the selling dealer under the MVAT Act, 2002 is in force on the date on which the sale of the goods specified in the tax invoice took place; that the transaction of sale has been effected by the selling dealer and shall be accounted for in the turnover of sales while filing the return and that the due tax, if any, payable on the sale has been or shall be paid.

3.5 Incidence of Tax

The liability to pay sales tax on the sale consideration arises at every point where a sale takes place and the liability would be on the full amount of the sale consideration. The liability need not be passed on by the selling dealer to the purchasing dealer. The Tax when collected forms a part of the sale price in view of the law laid down by the Constitution Benches of the Supreme Court.

There were contradictory decisions of the Courts whether selling dealer is an agent of the Government or not when he collects the tax from the purchasing dealer.

There is no right to a set off independent of the provisions of Section 48. The grant of a set off is a matter of policy introduced to protect the ultimate consumer against a cascading effect of taxes. While granting a concession in the form of a set off, it is open to the legislature to prescribed reasonable conditions that safeguard the interest of the Revenue. However the conditions may not be a burden on dealer to impossible of compliance.

Therefore it is utmost necessary to understand the Section 48 of MVAT Act.

3.6 Section 48 Setoff, refund, etc.

“(1) The State Government may, by rules, provide that,

(a) in such circumstances and subject to such conditions and restrictions as may be specified in the rules, a set off or refund of the whole or any part of the tax,

(i) paid under any earlier law in respect of any earlier sales or purchases of goods treated as capital assets on the day immediately preceding the appointed day or of goods which are held in stock on the appointed day by a person who is a dealer liable to pay tax under this Act, be granted to such dealer; or

(ii) paid in respect of any earlier sale or purchase of goods under this Act be granted to the purchasing dealer; or

(iii) paid under the Maharashtra Tax on Entry of Motor Vehicles into the Local Areas Act, 1987, (Mah. XLII of 1987) be granted to the dealer purchasing or importing motor vehicles; or

(iv) paid under the Maharashtra Tax on Entry of Goods into the Local Areas Act, 2002, (Mah. of 2002) be granted to the dealer;

(b) for the purpose of the levy of tax under any of the provisions of this Act, the sale price may in the case of any class of sales be reduced to such extent, and in such manner, as may be specified in the rules.

(2) No setoff or refund as provided by any rules made under this Act shall be granted to any dealer in respect of any purchase made from a registered dealer after the appointed day, unless the claimant dealer produces a tax invoice, containing a certificate that the registration certificate of the selling dealer was in force on the date of sale by him and the due tax, if any, payable on the sale has been paid or shall be paid and unless such certificate is signed by the selling dealer or a person duly authorized by him.

(3) Subject to the provisions contained in subsection (4), where no tax has been charged separately under any earlier law, the rate of tax applicable for the purposes of calculating the amounts of setoff, or refund in respect of any earlier sale or purchase of goods, or for the purposes of reduction of sale or purchase price for levy of tax, shall be the rate setout against the goods in the relevant Schedule under any earlier law.

(4) Where, under any notification issued under this Act or as the case may be, any earlier law, any sale or purchase of goods has been exempted from the payment of whole of sales tax or purchase tax, then, for the purposes of subsection (3), the rate of tax applicable shall be nil; and where it is exempted from payment of any part of sales tax (or purchase tax), the rate of tax applicable shall be the rate at which the payment of tax is to be made by virtue of such exemption.

(5) For the removal of doubt it is hereby declared that, in no case the amount of setoff or refund on any purchase of goods shall exceed the amount of tax in respect of the same goods, actually paid, if any, under this Act or any earlier law, into the Government treasury except to the extent where purchase tax is payable by the claimant dealer on the purchase of the said goods effected by him:

Provided that, where tax levied or leviable under this Act or any earlier law is deferred or is deferrable under any Package Scheme of Incentives implemented by the State Government, then the tax shall be deemed to have been received in the Government Treasury for the purposes of this subsection.

(6) Where at any time after the appointed day, a dealer becomes entitled to a refund whether under any earlier law or under this Act, then such refund shall first be applied against the amount payable, if any, under any earlier law or this Act and the balance amount, if any, shall be refunded to the dealer.”

In view of the above provision of MVAT Act, the recent Judgements in case of (A) M/S. Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur v/s The State of Maharashtra & Ors. In writ petition no. 33 of 2012 decided on 11-05-2012

(B) M/S. Premium Paper and Board Industries Ltd. v/s The Jt. Commissioner of Sales Tax Investigation-A & Ors., in writ petition no. 347 of 2012 decided on 30-04-2012

By Hon. Bombay High Court required to be study in the recent scenario.

Let us now discussed the case of M/S. Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur which dealt with purchase effected from genuine dealers.

4. (A) Let us now discussed the case of M/S. Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur v/s The State of Maharashtra & Ors. in writ petition no. 347 of 2012 decided on 30-04-2012 which dealt with the purchases effected from the genuine dealer.

Facts of case as narrated at para 3 of Judgement as under:

“3. The Petitioner which is a partnership firm and a dealer registered under the MVAT act, 2002, carries on business as a reseller in cotton bales. For 2009-10, the Petitioner filed its returns and, based on the purchases effected by it, claimed Input Tax Credit (ITC) by way of a asset off under Section 48. According to the Petitioner, the claim was supported by tax invoices of its vendor. On 4^th December’ 2010, Petitioner claimed a refund of Rs. 21.08 lakhs, resulting from the return filed. The Petitioner claims to have submitted data, transaction wise, in relation to its supplier, including the invoice number, date of supply, the registration number of the supplier and VAT paid on each purchase. By a letter dated 25^th July’ 2011, the Deputy Commissioner of Sales Tax, Kolhapur informed the Petitioner of a list of dealers from whom the Petitioner had effected purchases where the data received was matched or, as the case may be, unmatched. The Petitioner was called upon to submit ledger copies and proof of the filing of returns by the dealer in those cases where the data was unmatched. Failing this, it was stated that ITC of the concerned dealers would be disallowed. After a personal hearing the Deputy Commissioner by his letter dated 16^th September 2011 communicated the quantum of ITC which allowable in accordance with a `matched list’ and that which was not allowable according to an `unmatched list’. The Petitioner was also informed that the assessment would be taken up under Section 23. The Deputy Commissioner of Sales Tax passed an order of assessment on 20^th October’ 2011. The Assessing Officer allowed a set off to the Petitioner to the extent of Rs. 48.95 lakhs and reduced the claim of refund from Rs. 21.08 lakhs to Rs. 2.17 lakhs.

5. Issue before the Hon. High Court

The issue before the Court was narrated at para 10 of Judgement as under:

“10. The constitutional validity of Section 48(5) of the Maharashtra Value Added Tax Act, 2002 (MVAT Act, 2002) was challenged, under Article 14 & 19 (1) (g) of Constitution. In the alternative, if its validity is upheld, the Petitioner seeks that the words “actually paid” be read down to mean “ought to have been paid”. The Petitioner challenges an order of assessment and seeks mandamus to the State to recover from the vendor tax paid on goods of which a set off is claimed. Consequential orders of set off and refund are sought.

The Petition was placed for hearing and final disposal in a batch of Petitions challenging the constitutional validity of Section 48(5). During the course of the hearing of several companion Petitions, the State Government had filed affidavits in reply pointing out that investigation revealed the existence of Hawala transactions where there was no sale of goods and the selling dealer had merely issued tax invoices to the purchasing dealer in order to defraud the Revenue and to allow the benefit of a set off. In several of those cases, this Court declined to exercise its writ jurisdiction under Article 226 of the Constitution, keeping the issue of constitutional validity of Section 48(5) open since the assessment was still to take place, during the course of which a full enquiry of facts would result.

In the present proceedings as well as in the companion petitions, it has not been the contention of the Petitioners that a claim to a set off under Section 48 should be allowed even in those cases where the transaction of sale is sham or in cases involving fraud, collusion or connivance between selling and purchasing dealers.

In the present case though there is no allegation in the reply of a Hawala transaction, it has been stated on affidavit by the State that a number of dealers from whom the Petitioner purchased goods are untraceable. Since we have been called upon to decide in these proceedings, the constitutional validity of the provisions of Section 48(5), we have heard submissions of all the Counsel representing the concerned parties in support of their challenge to the validity of the provision.”

6. Submission of Petitioner

The Petitioner has submitted the challenge to the constitutional validity of Section 48(5), which were narrated at para 11 as under:

“11. (i) Having regard to the plain language of Section 48(5) and its legislative history, the provision has no application to a situation involving the nonpayment of tax by a selling dealer in a bona fide case where there is no fraud, connivance or collusion between the selling and purchasing dealers. Section 48(5) applies only to a situation involving a variation between the rates of tax mentioned in the schedule and the actual rate contained in an exemption notification;

(ii) Alternately if the benefit of a set off is denied in every case because of the nonpayment of tax by the selling dealer, the provision will be rendered unreasonable and violative of Article 14;

(iii) The provisions of the MVAT Act, 2002 have been enacted to provide a method of taxation which prevents a cascading effect. This in itself is in the public interest;

(iv) As much as being the duty of a selling dealer to pay tax, it is the duty of the State to enforce the obligation of the selling dealer to pay tax into the Treasury. Though the purchasing dealer has paid the tax to the selling dealer, he is yet denied the benefit of a set off which is arbitrary;

(v) The purpose of a Value Added Tax is to avoid a cascading effect and the tax is an indirect tax. The purchasing dealer does not factor the tax as a cost and what is passed on to the customer is the tax that is actually paid. Consequently, even if the immediate selling dealer has not paid tax, a set off would be available to the purchasing dealer against the tax paid in the earlier link in the chain.”

7. Submission of State

Submission on behalf of State by the Advocate General was narrated at para 12 of the Judgement as under:

“12. i) Under Section 3 the incidence of tax is on the dealer. Every dealer is liable to pay sales tax on his transaction with the purchasing dealer;

ii) Under Section 48(1) (a) a set off is available in respect of tax paid; tax paid means tax in actual fact paid;

iii) Section 48(2) is a facility given to the purchasing dealer to get a set off even before tax is paid into the Treasury. Section 48(2), however, does not expand the scope of a set off; iv) Set off is a concession which has been granted by the State legislature in order to prevent a cascading effect. While granting the concession the legislature is entitled to prescribe a condition of the nature provided in Section 48(5) to the effect that in no case shall the amount of the set off exceed the amount of tax in respect of the same goods actually paid into the Government Treasury;

v) But for Section 48, there would have been no right to claim a set off. Moreover, under Section 48(1)(a) a set off can be availed of only where tax is paid and hence Section 48(5) is only clarificatory;

vi) The liability to pay sales tax on the sale consideration arises at every point where a sale takes place and the liability would be on the full amount of the sale consideration. The liability need not be passed on by the selling dealer to the purchasing dealer. The tax when collected forms a part of the sale price in view of the law laid down by the Constitution Benches of the Supreme Court. The selling dealer is not an agent of the government when he collects the tax from the purchasing dealer. The sequitur is that the purchasing dealer is liable to pay sales tax when he assumes the character of a selling dealer who sells goods under a sale transaction. That liability is undiminished;

vii) There is no right to a set off independent of the provisions of Section 48. The grant of a set off is a matter of policy introduced to protect the ultimate consumer against a cascading effect of taxes. While granting a concession in the form of a set off, it is open to the legislature to prescribe reasonable conditions that safeguard the interests of the Revenue;

(viii) The provisions of Section 48(5) are constitutional. In fiscal and economic matters, the legislature has a large degree of latitude and the court will not readily accept a challenge to constitutionality;

(ix) Section 48(1) (a) uses the expression “paid” while Section 48(5) uses the expression “actually paid”. The Court cannot rewrite the provisions of the statute. When a provision of law is constitutional, no question of reading down the provision would arise;

(x) The power to enact tax legislation includes the power to enact provisions that would prevent the evasion of tax. In enacting the provisions of Section 48(5) the State legislature has introduced a provision that would ensure that the benefit of a set off is granted only where the tax was in the first instance paid into the Treasury. The intention at all material times has been that a set off should be allowed only where the tax has actually been paid into the Treasury.”

8. Cases discussed

Hon. High Court has discussed the cases which are as under:

(1) Tata Iron and Steel Company v/s State of Bihar (SC) (AIR 1958 SC 452)

Observed that the primary liability to pay sales tax, so far as the State is concerned, is on the seller.

(2) George Oakes (Private) Ltd. v/s State of Madras (AIR 1962 SC 1037)

Held that when the seller passes on a tax and buyer agrees to pay the sales tax in addition to the price, “the tax is really part of the entire consideration and the distinction between the two amounts – tax and price – looses all significance from the point of view of legislative competence”. The Constitution Bench held that while enacting legislation under entry 54 of List II it is not incompetent to the legislature to make the tax paid by the purchaser to the dealer together with the sale price in consideration of the goods sold a part of the turnover of the dealer; “nor does it mean that in law the tax as imposed by government is a tax on the buyer making the dealer a mere collecting agency so that the tax must always remain outside the sale price”.

(3) Khazan Chand v/s State of Jammu and Kashmir (AIR 1984 SC 762)

Enunciates that the liability to pay sales tax is that of the dealer and not of the persons who purchase goods from him and for the purpose of sales tax, it is immaterial whether the price of goods has been paid to the dealer or is payable to him. The liability of the dealer to pay sales tax is irrespective of whether he has made a profit or loss in his business and whether he has received the sale price or not. The purchaser is not bound to pay sales tax payable by the vendor unless he had agreed to do so and where the purchaser agrees to pay that amount, it forms part of the sale price.

(4) Central Wines v/s Special Commercial Tax Officer (1987-2-SCC 371)

The judgment in Central Wines reiterates that the selling dealer, even when he collects tax from the purchaser does not act as an agent for the revenue and this would not turn on whether or not the invoice does or does not reflect the amount of tax separately.

(5) (i) State of Punjab v/s Atul Fasteners Ltd. (7 VST 278 (SC))

(ii) Corporation Bank v/s Saraswati (19 VST 84 (SC))

(iii) Bata India Ltd. (53 STC 132)

Held that sales tax is collected by a dealer as an agent of the State.

(6) Godrej & Boyce Mfg. Co. Pvt. Ltd. v/s Commissioner of Sales Tax ((1992) 3 SCC 624)

The judgment of the Supreme Court enunciates that

(i) The dealer has no legal right to claim a set off of the purchase tax paid and of input credit from the sales tax payable on the sale of goods manufactured by him; (ii) The entitlement to a set off flows only out of the rules; (iii) The grant of a set off is in the nature of a concession; and (iv) It is open to the legislature while granting the concession to restrict or curtail the extent of the entitlement as a condition attaching to the concession.

There is no reason for the Court to depart from the plain and ordinary meaning of the words “actually paid”, when used in the context of Section 48(5).

In the context in which the words “actually paid” are used in the MVAT Act, “actually paid” means what has been as a matter of fact deposited in the treasury. Hence, in the context of the provisions of Section 48(5), we cannot accept the contention of the Petitioner that “actually paid in the government treasury” means or should be read to mean what tax ought to have been deposited but has not actually been deposited in the treasury.

(7) The decision of the Punjab and Haryana High Court in Gheru Lal Bal Chand vs. State of Haryana, 26 arose on a challenge to the provisions of Section 8(3) of the Haryana Value Added Tax Act, 2003. Section 8(3) was to the following effect:

“S.8 Determination of input tax (1) and (2)…

(3) Where any claim of input tax in respect of any goods sold to a dealer is called into question in any proceeding under this Act, the authority conducting such proceeding may require such dealer to produce before it in addition to the tax invoice issued to him by the selling dealer in respect of the sale of the goods, a certificate furnished to him in the prescribed form and manner by the selling dealer; and such authority shall allow the claim only if it is satisfied after making such inquiry as it may deem necessary that the particulars contained in the certificate produced before it are true and correct.”

The Punjab and Haryana High Court held that while the genuineness of a certificate and a declaration may be examined by the taxing authority, the onus cannot be placed on the assesses to establish the correctness or the truthfulness of the statements recorded therein. The High Court held that the Department must allow the claim once a proper declaration is furnished. In the event of its falsity, the Department can proceed against the defaulter when the genuineness of the declaration is not in question. However, an exception has been carved out in the event that fraud, collusion or connivance is established between the registered purchasing dealer or the immediate preceding selling dealer or the earlier dealer in the chain.

9. Assurance & Statement made by the State Government

It is important to note that The State Government has placed before the Court, both on affidavit and during the course of the hearing, the steps which it shall pursue against a selling dealer who, having collected tax from the purchasing dealer does not deposit the tax into the Government Treasury, which were narrated at the para 50 & 51 of the Judgement as under:

“50. The regime of electronic filing generates data pertaining to a web of complex transactions. The system of tax collection, assessment and refunds can move towards a more objective and transparent process with the deployment of electronic and digitized processes. The system is capable of providing transparent and accountable governance for the tax payer. It allows authorities to investigate transactions which in the manual processes followed in an earlier era would have been difficult or complex. Electronic filing of returns, payments and audited statements would enable a matching process to be carried out between the input credit claimed by way of a set off and the tax which has been deposited by the selling vendor.

During the course of the hearing of these proceedings, the Court has been informed that corrective action shall be taken to allow an additional claim of input tax credit to a claimant dealer even where it has been initially disallowed by the Department. The State sales tax department has stated before the Court that while the electronic system is being continuously evolved, the following steps are being taken to promote greater transparency and efficient handling of claims for input tax credit:

(a) At the end of each financial year, the Sales Tax Department will reconcile the data on its system and inform the dealer about the input tax credit which may have become available on reconciliation, allowing the claimant dealer to seek an additional claim of refund to the extent of his input tax credit so matched in such cases; and

(b) The Department shall, during the course of the current year set up a Dealer Information System (DAS) and Dealer Ledger account showing the status of the taxes collected and paid on the web portal of the Maharashtra State Sales Tax Department (www.mahavat.gov.in) in order to facilitate the process of the grant of additional claim of input credit to claimant dealers.”

“51. The Learned Advocate General appearing on behalf of the State has tendered a statement of the steps that would be pursued against defaulting selling dealers :

1) The Sales Tax Department will identify the Defaulters namely, registered selling dealers who have not paid the full amount of tax due in the Government Treasury either by not filling their returns at all or by filing returns but not paying the full tax due (i.e. “short filing”) or where returns are filed but sales to the concerned dealers are not shown (i.e. “undisclosed sales”).

2) Set off will be denied to dealers where at any stage in the chain of sales a tax invoice/certificate by a Defaulter is or has been relied on:

a) In the event of no returns having been filed by the Defaulter, the dealers will be denied the corresponding set off;

b) In the case of short filing, dealers who have purchased from the Defaulter will be granted set off pro rata to the tax paid;

c) In the case of undisclosed sales, the dealers will be denied the entire amount being claimed as set off in relation to the undisclosed sale;

d) To prevent a cascading effect, the tax will be recovered only once. As far as possible, the Sales Tax Department will recover the tax from the dealer who purchases from the Defaulter. However, the Sales Tax Department will retain the option of denying a set off and of pursuing all selling dealers in the chain until recovery is ultimately made from any one of them.

3) The full machinery of the Act will be invoked by the Sales Tax Department wherever possible against Defaulters with a view to recover the amount of tax due from them, notwithstanding the above. Once there is final recovery (after exhaustion of all legal proceedings) from the Defaulter, in whole or part, a refund will be given (after the end of that financial year) to the dealer(s) claiming set off to the extent of the recovery. This refund will be made pro rata if there is more than one dealer who was denied set off;

4) Refund will be given by the Sales Tax Department even without any refund application having been filed by the dealers, since the Sales Tax Department will reconcile the payments, inform the dealer of the recovery from the Defaulter concerned and grant the refund;

5) Details of Defaulters will be uploaded on the website of the Sales Tax Department and dealers denied set off will also be given the names of the concerned Defaulter(s);

6) The above does not apply to transactions by dealers where the certificate/invoice issued is not genuine (including Hawala transactions). In such cases, no set off will be granted to the dealer claiming to be a purchaser;

7) The above should not prevent dealers from adopting such remedies as are available to them in law against the Defaulters.”

10. Decision of Hon. Bombay High Court

Hon. Bombay High Court has decided at para 53 & 54 as under:

“53. In the view which we have taken in these proceedings, the constitutionality of the provision of Section 48(5) is upheld.

Similarly Section 51(7) which requires an application for refund and specifies the period within which an application can be made, cannot be assailed as being invalid. Regulating the process of refunds is as much within the province of a legitimate tax enactment and the legislature is within its power in requiring a refund to be applied for within a reasonable period.

The right to obtain a set off is a right conferred by statute and the legislature while recognizing an entitlement to a set off in certain circumstances is lawfully entitled to prescribe the conditions subject to which a set off can be obtained. If the legislature, as in the present case, prescribes that a set off should be granted only to the extent to which tax has been deposited in the treasury on the purchase of goods, it is within a reasonable exercise of its legislative power in so mandating. This does not offend Article 14. A plea of hardship cannot result in the invalidation of a statutory provision in a fiscal enactment which is otherwise lawful.

At the same time, we have set out in detail the assurance which has been placed before the Court by the State Revenue in the present case of the steps that would be taken to pursue recoveries against selling dealers who have either not filed returns or, having filed returns have not deposited the tax collected from the purchasing dealer in whole or in part.”

“54. For the reasons indicated earlier, we do not find any merit in the challenge to the provisions of Section 48(5) of the MVAT Act, 2002. We decline to accede to the prayer for reading down the provisions of Section 48(5). The order of assessment is subject to the remedy of an appeal in the course of which it would be open to the Petitioner to pursue the remedy available in law. As regards the recoveries to be made from the selling dealers, the State government and the sales tax authorities shall abide by the assurance and statement recorded in the judgment. The Petition shall accordingly stand disposed of. There shall be no order as to costs.”

(B) Now let us discussed the case of M/S. Premium Paper and Board Industries Ltd. in writ petition no. 347 of 2012 decided on 30-04-2012 which dealt with the purchase effected from Hawala dealers .

1. Facts of case as narrated at para 2 of the Judgement as under:-

“2. The petitioner is a registered dealer under the Maharashtra Value Added Tax Act, 2002 (MVAT Act) and under the Central Sales Tax Act, 1956. It has been averred in the petition that the Assistant Commissioner of Sales Tax, Investigation-3 visited the place of business of the petitioner under Section 64 on 14th October 2011. According to the petitioner on the assumption that certain vendors of the petitioner viz. (i) Accurate Multi Media Pvt. Ltd.; (ii) Ashrita Trading Co.; and (iii) Yashita Trading Co. have not filed returns or proper returns, the sales tax authority considered that the petitioner has claimed wrong Input Tax Credit (Set off) under the MVAT Rules, 2005. On this basis, it is asserted that the First Respondent invoked the provisions of Section 35 and passed an order of provisional attachment on 18 November 2001 which came to be served on the bankers and debtors of the petitioner. The grievance is that the orders of provisional attachment were passed without furnishing an opportunity of a hearing. According to the petitioner since the amount in dispute is RS.1.81 crores, the aggregate amount attached could not exceed that amount. The total receivable from the bankers and debtors of the petitioner was, however, claimed to be RS.23.29 crores, and according to the petitioner the amount which has been attached is far in excess of the claim of the Sales Tax authorities.”

2. Issue before the Hon. High Court

Issue before the High Court was narrated at para 1 of the Judgement:-

“1. In these proceedings under Article 226 of the Constitution, the petitioner has sought to question: (i) An order of provisional attachment dated 18th November 2011 in respect of certain bank accounts; (ii) In the alternative to restrict the attachment to the extent of Rs. 1.81 crores; (iii) An order striking down the provisions of Section 48(5) of the Maharashtra Value Added Tax Act, 2002 as unconstitutional; and (iv) A direction to the Commissioner of Sales Tax to hear an application filed by the petitioner against the order of provisional attachment.”

3. Submission of petitioner

The submission of petitioner was narrated at para 3 of the Judgement

“3. Moreover, it has been submitted by the Petitioner that the basis of the liability is worked out on a proposed disallowance of set off in the amount of RS.1.81 crores. The case of the petitioner is that under the MVAT Act and the Rules a purchasing dealer is entitled to a set off in respect of purchases effected from a registered dealer and supported by a tax invoice. The failure on part of the vendor to file proper returns cannot, according to the petitioner, be a ground for effecting a disallowance of set off from the purchaser. If necessary, the Revenue authorities can it is urged, take necessary action to assess and recover dues from the concerned vendors. According to the petitioners, if the burden is cast upon a purchasing dealer for the failure by a vendor to file proper returns, the action would be unconstitutional. In this regard it is asserted that by enacting Section 48(5) the Legislature has placed the burden upon a purchasing dealer which is impossible of performance and is ultra vires. On this basis it has been asserted that the provisions of Section 48(5) are ultra vires Articles 14, 19(1)(g) and 300A of the Constitution.”

4. Submission of Sales Tax Department

The submission of Sales Tax Department was narrated at para 4, 5, 6 & 8 as under:-

“4.An affidavit in reply has been filed in these proceedings by the Joint Commissioner of Sales Tax, Investigation-A. The reply notes that the petitioner who is a registered dealer filed its MVAT Returns for 2009-10 and 2010-11 and claimed Input Tax Credit / Set off on purchases claimed to have been effected from certain vendors against the tax liability on sales. An investigation was initiated at the behest of the Advisory Branch on an allegation that the transaction appeared to be with (i) Accurate Multi Media Pvt. Ltd.; (ii) Ashrita Trading Co.; and (iii) Yashita Trading Co. were found to be fictitious and these vendors were found to be engaged in the activity of only issuing tax invoices without actual delivery of goods and passing on tax credit without paying it in the Government Treasury. The allegation is that Hawala transactions were thus carried out in order to defraud the Revenue. Based on investigation of the Hawala dealers by the Sales Tax Authorities, it was noticed that there was a mismatch in the Input Credit claimed by the petitioner and the tax deposited into the Government treasury by the bogus vendors in respect of the purchases claimed to have been made by the petitioner from them.

5. The affidavit in reply states that during the course of the visit Mitesh Gandhi, a Director of the petitioner gave a statement on 18th October 2011. The Director stated that he had placed oral orders against these purchases from his vendors. He was unable to state the names of the persons on whom the oral purchase orders were placed. By a further communication the petitioner’s Director was given an opportunity to appear before the Investigation Officer and produce evidence including lorry receipts, transport receipts and other documents which may prove that he had actually received the goods which he claimed to have purchased from vendors. The Director however, neither attended the investigation process nor did he submit relevant evidence. The investigation also revealed that a person by the name Vishal Shah had induced the vendors to take registration under the Act. None of those persons were aware of the nature of the business or the quantum of the business. The affidavit in reply contents a detailed description of the vendors. Most of the vendors were found to be residing in hutments situated in slum areas. Several of them admitted in their statements that they had not carried on business relating to sales and purchases and that they had signed documents including invoices at the behest of Vishal Shah. The statement of Vishal Shah was also recorded during the course of investigation and he too stated that he did not possess any books of account of the alleged companies.

6. In the circumstances, it has been pointed out in the affidavit in reply that no one is claiming responsibility for the companies from whom the petitioner claims to have purchased the goods and claimed a set off. The Directors of the vendors from whom the petitioner claimed to have purchased goods belong to the low income group. They are not aware of anything relating to the business of the companies. The affidavit sets out that the three vendors referred to earlier has taken registration in 2009-10. In the very first year of the business the turnover of the three dealers was RS.54.36 crores, RS.27.41 crores and RS.14.76 crores respectively. These facts have been relied upon to submit before the Court that the petitioner is alleged to have purchased goods and to have consequently claimed a set off though a genuine business of purchase and sales was not shown in any of the transactions. Based on the preliminary estimates during the course of investigation the liability of the petitioner together with interest has been estimated to be RS.1.81 crores. A provisional attachment was levied under Section 35 which has since been restricted to an amount of RS.1.81 crores. Following the initial order of provisional attachment, the petitioner moved an application before the Commissioner of Sales Tax. On that application an order has been passed on 12th April 2012 by which the attachment has been confirmed only to the extent of an amount of Rs. 1.81 crores.

8. On behalf of the State Government it has been submitted in the affidavit in reply that mere issuance of invoices or filing of returns does not constitute sales. For effecting actual sales, goods must move from the seller to the hands of the buyer. Tax has to be levied and collected by the selling dealer who should deposit this tax in the Government treasury. In other words, without a delivery of goods merely issuance of invoices and filing of returns and passing of credit of tax cannot result in the grant of a set off.”

5. Observation of High Court

The observation of Bombay High Court as narrated at para 13 of the Judgement:-

“13. The material which has been placed on record in the affidavit in reply is prima facie sufficient to provide ample foundation for the action which has been adopted by the State Sales Tax authorities. At least, prima facie, it is evident from the affidavit in reply as well as the underlying materials which are annexed thereto, including statements which have been recorded during the course of investigation that the selling vendors do not appear to be genuine parties. Almost immediately after registration, the alleged vendors have transacted business in large sums of RS.54.36 crores, RS.27.41 crores and RS.14.76 crores. The material which has been revealed during the course of investigation suggests that the selling vendors are parties without any legitimate business or assets and have been set up only with a view to devise a scheme to defraud the Revenue. We clarify that we make these observations only prima facie, since the entire matter is still to be investigated following which a regular assessment would be framed. Nothing contained in this order would be regarded as the expression of final or conclusive opinion by the Court on the issue which would arise during the course of assessment.

6. Decision of Hon. Bombay High Court

The decision of Bombay High Court dismissing the writ petition as narrated at para 14 of the Judgement:-

“14. The challenge to the constitutional validity of any provisions of law cannot be entertained in a vacuum. If the entire basis of the claim of set off is found upon assessment to be bogus or fraudulent, the challenge to Section 48(5) cannot be entertained at the behest of the Petitioner, in that event. Therefore, before the issue of constitutional validity is considered, the basic facts would need to be established in the course of assessment proceedings. Learned Senior Counsel for the Petitioner has also not submitted that the assessee / dealer would be entitled to a set off even if the underlying transaction of sale is bogus, fraudulent or sham. The issue as to whether the petitioner is disabled from a claim of set off under Section 48(5) is a matter which would be determined during the course of assessment proceedings and in appeal. To entertain a challenge at the present stage would, besides being premature, be wholly inappropriate, particularly having regard to the material which has been revealed thus far during the course of investigation. For these reasons we do not consider it appropriate or proper to exercise the extraordinary writ jurisdiction of this Court under Article 226 of the Constitution. The issue as to the validity of Section 48(5) is hence not adjudicated upon at this stage in the present case. The Petition shall accordingly stand dismissed. There shall be no order as to costs.”

11. Implication of Judgement

Let us analyse the Judgements on the basis of facts of case and submission made by Petitioners and Revenue, various decisions discussed and the final decision of the Hon. Bombay High Court as under:-

1.1 In case of M/S. Mahalaxmi Cotton Ginning Pressing and Oil Industries & Ors. Petitioner has only challenge the constitutional validity of Section 48(5) of MVAT Act under article 14 of the Constitution. In the alternative if its validity is upheld, the words “actually paid” to be read down to mean “ought to have been paid.”

Petitioners have not contended that a claim of set off U/S. 48 should be allowed even in those cases where the transaction of sale is sham or in cases involving fraud, collusion or connivance between selling and purchasing dealers.

1.2 Therefore Hon. Bombay High Court after detail analysis of various Judgements upheld the constitutional validity and conditions prescribed as per Section 48 of MVAT Act.

2.1 In case of M/S. Premium Paper and Board Industries Ltd. Petitioners have effected purchases from the Hawala dealer and claim the set off.

2.2 However Hon. High Court held the allowability of set off can be considered in the assessment proceeding in appeal hence dismissed the writ being premature.

3. One should not keep an impression that the constitutional validity of Section 48 of MVAT Act, was upheld has given ample powers to the Sales Tax Department or the various proceedings conducted by the Sales Tax Department as valid.

4. According to me the State Government and Sales Tax Authority shall abide by the assurance and statements recorded in the Judgement. Now the Sales Tax Department should act judiciary for disallowance of set off, and they have to follow the steps / procedures which are narrated at para 50 & 51 in the Judgement.

5. So far as purchases effected from genuine dealer who has either not filed the returns or made short payment of tax, the Department will first recover tax from such defaulter in whole or part and set off will be given to the extent of recovery to the claimant dealer on pro-rata basis.

6. However if claimant dealer has purchase from the Hawala dealer, then in such cases Department will first recover tax from such defaulter in whole or part and set off will be given to the extent of recovery to the claimant dealer on pro-rata basis.

7. It is very clear that one should not support any person who has been involved in fraud, collusion or connivance of such sale and purchase Hawala transactions. However at the same time genuine dealer should not suffered who have acted bonafidely.

Many times in trade dealer rely on broker or commission agent for sales and purchase of goods and such broker or commission agent submit the bill and collect the cheque on behalf of the said vendor / dealer. In such circumstances I am of the view that the dealer should write letter to the concerned officer asking the following details:-

(a) To supply the details of all materials gathered which are used against for the disallowance of set off.

[Held in case of Vasantji Ghelot & Co.v/s Commissioner of Sales Tax (40 STC 544 (BHC))]

(b) Whether the Department has taken any steps against the defaulter dealer / Hawala Dealer for the collection of tax or any assessment has been completed then to ask for the copy of assessment order.

(c) The details of how much the tax has been paid by the defaulting dealer / Hawala dealer. How the credit is given on pro-rata basis by the Department for the tax which has been collected from the said Vendors / Hawala Dealers. Department cannot keep the tax received as it will be un-just enrichment on the part of the Government.

(d) Affidavit cannot be used as an evidence against the person without giving an opportunity of cross examination of the vendor which violates the principle of natural justice [as held in case of Marneedi Satyam vs. Masimukkula Venkataswami, A.I.R. 1949 Mad 689].

(e) If purchase effected from so called Hawala Dealer in bonafide belief then dealer should preserve the confirmation of ledger account in books of accounts vendor on his letterhead duly confirmed by the vendor along with copy of tax paid challians. Copy of Purchase invoices along with delivery challan and the copy of bank statements mentioning the payment made to vendor / Hawala dealer by Accounts Payee’s cheque to substantiate claim of set off and indulge in the litigation proceeding at later stage.

Conclusion:-

I conclude that the implication of the above Judgements should be taken in right spirit and has far reaching effect. The Judgement may being unexpected liability on purchases without having any mechanism o protect themselves from defaulting vendors. If the Department would like to disallow the set off claimed by the claimant dealer without following the any procedure of natural justice or arbitratory may lead to serious legal consequences.

(II) Implication of Judgement in case of Maharashtra Chamber of Housing Industry & Others

1. Introduction

The levy of tax on Works Contract transaction was possible after 46^th amendment to the Constitution by amendment to Article 366 (29A) and Entry 54 of the State list to the Seventh schedule to the Constitution.

Accordingly under the MVAT Act the definition of Sales U/S. 2(24) has brought in its ambit by Explanation Clause (b), the scope of levy of tax on Works Contract activities which were carried on movable property.

However on 20-06-2006 the “Works Contract” word were defined in the Explanation (b) (II) to Section 2(24) of MVAT Act has enlarged the scope of levy of tax of works contract transaction carried on movable or immovable property.

On 01-06-2009 rule 58 (1A) was inserted granting deduction of cost of land. Hon. Commissioner of Sales Tax has issued the Trade Circular No. 12T of 2007 dt. 07-02-2007 relying on the Supreme Court Judgement M/S. K. Raheja Development Corporation (141 STC 298 (SC)).

A notification dt. 09-07-2010 issued by the State Government has notified a Composition Scheme by insertion of Section 42(3A) of MVAT Act w.e.f. 01-04-2010. The Composition Scheme applies to registered dealers who undertake the construction of flats, dwellings, buildings or premises and transfer them in pursuance of an agreement along with land or interest underlying the land. The composition amount prescribed at 1% of the agreement amount specified in the agreement or valuation as per stamp duty under the Bombay Stamp Act’ 1958 whichever is higher subject to certain conditions.

Therefore it is necessary to understand the relevant provisions of MVAT Act’ 2002 / MVAT Rules’ 2005.

2. Relevant provisions of MVAT Act & Rules

2.1 Definition of Sales U/S. 2(24) r.w. Explanation Clause (b)

“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 expressions shall be construed accordingly.”

Clause (b) of the Explanation to the Section defined what would be a sale for the purpose of the clause and brought in its ambit the following transactions:

“(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 execution of' a works contract;

(iii) a delivery of goods on hire-purchase or any system of payment by installments;

(iv) the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

(v) the supply of goods by any association or body of persons incorporated or not to a member thereof or other valuable consideration;

(vi) 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 drink (whether or not intoxicating), where such supply or service is made or given for cash, deferred payment or other valuable consideration.”

2.2 With effect from 20 June 2006 the provisions of Explanation (b) (ii) to Section 2(24) were define the works contract as under:-

“works contract including 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”

2.3 Rule 58(1) of the Rules framed under the Maharashtra Value Added Rules, 2005 provides that the value of the goods at the time of the transfer of property in goods involved in the execution of a works contract may be determined by effecting the following deductions from the value of the entire contract, in so far as the amounts relating to the deduction pertain to the said works contract:

(a) labour and service charges for the execution of the works;

(b) amounts paid by way of price for sub-contract, if any, to sub-contractors;

(d) charges for obtaining on hire or otherwise, machinery and tools for the execution of the works contract;

(e) cost of consumables such as water, electricity, fuel used in the execution of works contract, the property in which is not transferred in the course of execution of the works contract;

(f) cost of establishment of the contractor to the extent to which it is relatable to supply of the said labour and services;

(g) other similar expenses relatable to the said supply of labour and services, where the labour and services are subsequent to the said transfer of property;

(h) profit earned by the contractor to the extent it is relatable to the supply of said labour and services.”

The Proviso to sub-rule (1) stipulates that where the contractor has not maintained accounts which enable a proper evaluation of the different deductions as above or where the Commissioner finds that the accounts maintained by the contractor are not sufficiently clear or intelligible, the contractor, or, as the case may be, the Commissioner may in lieu of the deductions as aforesaid provide a lump sum deduction as enunciated in the table annexed to the Rule.

2.4 Sub-rule (1A) was inserted into Rule 58 by a Notification dated 1 June 2009 reads as follows:

"(1A) In case of a 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 making the deductions under sub-rule (1) and 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, deduction towards cost of land under this sub rule shall not exceed 70% of the agreement value."

2.5 The Commissioner of Sales Tax has issued Trade Circular No. 12T of 2007 dt. 07-02-2007 narrated at para 5 of the Judgement as under:-

“5. On 7 February 2007 a Trade Circular was issued by the Commissioner of Sales Tax following the decision of the Supreme Court in the case of M/s. K. Raheja Development Corporation (141 STC 298 (SC)). The Circular adverts to the judgment of the Supreme Court and clarifies that any transfer of property after 20 June 2006 irrespective of whether an agreement was signed prior to that date would be governed by the amended definition of “sale” under Section 2(24) of the Act. The circular clarifies that tri partite agreements between land owners, developers and prospective buyers would also be covered by the amendment. The Trade Circular also contains a clarification that an earlier determination made by the Commissioner of Sales Tax on 28 June 2004, which was prior to the amendment to Section 2(24) would not govern subsisting contracts in view of the amended provisions. Finally the Circular draws attention to the decision of the Supreme Court in K.Raheja (Supra) that if the agreement is entered into after the flat or unit is already constructed, then there would be no works contract, but so long as an agreement is entered into before the construction is complete, it would constitute a works contract. Finally, the Circular states that it is only clarificatory in nature and cannot be used as such for interpretation of the provisions of law.”

2.6 The Government of Maharashtra has issued the notification on 09-07-2010 notifying the Composition Scheme U/S. 42(3A) of MVAT Act w.e.f 01-04-2010 which has been narrated at para 6 as under:-

“6. On 9 July 2010 the Government of Maharashtra provided for a scheme of composition under Section 42(3A). The composition scheme applies to registered dealers who undertake the construction of flats, dwellings, buildings or premises and transfer them in pursuance of an agreement along with land or interest underlying the land. The composition amount is prescribed at one percent of the agreement amount specified in the agreement or the value specified for the purpose of Stamp Duty under the Bombay Stamp Act, 1958 whichever is higher. The composition scheme is subject to certain conditions.”

In view of the above amendments in MVAT Act and Rules from time to time, and Trade Circulars issued by the Commissioner of Sales Tax following the decision of the Supreme Court in case of M/S. K. Raheja Development Corporation was debatable.

Therefore the recent Hon. Bombay High Court Judgment in case of Maharashtra Chambers of Housing Industry & Ors. Decided on 10-04-2012, require to study as regards to the liability of tax of Builders & Developers.

3. Issue before the Hon. High Court

Petitioner Maharashtra Chamber of Housing Industry & Ors. have challenged in writ the following constitutional validity:-

1. The State Legislature competent to impose tax on sale of goods involved in execution of contract Under Article 366(29A) (b) of the Constitution.

2. The legislative competent of the State Legislature was questioned to impose a tax on transaction which does not involve a sale of goods within the meaning of entry 54 of the State list to the Seventh Schedule to the Constitution
and hence transgressed the limitation on its legislative power under Article 246(3) of the Constitution.

3. Amendment to section 2(24) of MVAT Act which has brought within ambit and purview of expression “sale”, and agreement for construction of building / premises on immovable property which is not a works contract. The amendments transgressed the limitations contained in Article 366(29A) of the Constitution.

4. Trade Circular No. 12T of 2007 dt 07-02-2007 issued by the Commissioner of Sales Tax clarifying the scope of amendment.

5. State notification dt. 01-06-2009 notifying insertion of Rule 58 (1A).

6. State Notification dt. 09-07-2010 notifying a Composition Scheme

7. The legitimacy of certain notices which have been issued by Sales Tax Authorities.

4. Submission of the Petitioner

The Petitioner has submitted the challenge to the constitutional validity of Section 2(24), which was narrated at para 7 as under:

“7. 1. The Forty Sixth Amendment to the Constitution which led to the insertion of Article 366(29A) was to overcome the judgments of the Supreme Court, inter alia in State of Madras Vs. Gannon Dunkerley & Co.2 The Supreme Court held that where an indivisible works contract was entered into involving both a transfer of goods or materials on the one hand and a component for the supply of labour and services on the other, it would not be open to the State Legislatures to impose a tax on the sale of goods involved in the execution of such a contract under Entry 54 of the State List to the Seventh Schedule. The State Legislatures could, however, do so where the contract was a divisible contract in the

sense that there were two independent contracts involving supply of goods and materials and another contract involving supply of labour and services;

2. In order to attract the application of Article 366(29A)(b) in relation to a works contract the following conditions must be fulfilled:

(i) There has to be a transfer of property in goods;

(ii) The expression “goods” is as defined in Article 366(12); and

(iii) Such transfer has to be in the execution of a works contract.

3. As a result of the Forty Sixth Amendment an indivisible works contract is by legal fiction made divisible into a contract for supply of materials and a contract for supply of labour and services. However, even after the enactment of the Forty Sixth Amendment, what can be brought to tax by the State Legislatures under Entry 54 of List I is a transfer of property in goods involved in the execution of a works contract. A contract for the sale of immovable property is not a works contract. A contract which involves the sale of immovable property cannot be split by the State Legislatures, even if there is an element of a works contract. In other words the State Legislature cannot locate a sale of immovable property and then attempt to trace out what are the goods involved in the execution of the contract;

4. The amendment to Section 2(24) is beyond the Legislative competence of the State Legislature. What the State Legislature has attempted to do by the amendment and by the insertion of Rule 58(1A) is to split a contract for the sale of immovable properties into three parts: (i) a contract for supply of goods and materials; (ii) a contract for supply of labour and services; and (iii) the cost of the immovable property. A contract for the sale of immovable property does not fall within any of the sub-clauses of Article 366(29A) and consequently it is not open to the State Legislature to expand the ambit of the deeming fiction that is created by the Forty Sixth Amendment;

5. A works contract involves only two elements viz. (i) the transfer of property in goods; and (ii) supply of labour and services. If a third element is involved in the contract viz. the sale of immovable property it does not constitute a works contract and hence to such a contract, the legal fiction which is created by Article 366(29A) would not apply. The amendment to Section 2(24) has the effect of expanding the definition of the expression sale of goods under Article 366(29A) and is, therefore, beyond the legislative competence of the State Legislature. The Trade Circular dated 17 February 2007, the amendment to Rule 58 and the Notification dated 9 July 2010 indicate the agreements which are contemplated to be brought within the purview of Section 2(24). Those agreements are simplicitor agreements for the sale of immovable property;

6. A contract which is governed by the Maharashtra Ownership Flats (Regulations of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 (MOFA) cannot be regarded as a works contract. Such a contract is an agreement for the purchase of immovable property in its complete sense. An agreement which is governed by the MOFA is an agreement simplicitor for transfer of immovable property. The right of the purchaser of a flat is to ensure that the construction is carried out in accordance with the contract and that the land and building is conveyed by the developer to the co-operative society. Such a transaction is only one for the transfer of a flat and does not constitute a works contract. An agreement under the MOFA does not confer any title to or interest in the purchaser of the flat until a conveyance is executed under Section 11 by the promoter in favour of the cooperative society.”

7. Where there is a transfer of a building by a deed of conveyance or a transfer of immovable property that was never intended to constitute a transfer of goods involved in the execution of a works contract. Such a contract is not and cannot be a works contract. In a works contract property gets transferred as a result of accretion during the course of the execution of the contract and there is no transfer of immovable property simplicitor. The essence of a works contract is the transfer of property by accretion. Consequently, where a contract involves sale of immovable property, it can never be regarded as involving a works contract;

8. The Maharashtra Value Added Tax Act, 2002 ignores the concept of plurality of deemed sales. Where the developer is the owner of the land, the promoter is both the owner and developer. Alternately a developer may enter into a development agreement with the owner of the land. When a promoter appoints a sub contractor and gets a building constructed, that contract is a works contract under Article 366(29A) and a transfer of the property in the goods involved in the execution of the works contract takes place to the developer. That would be the first deemed sale. When the developer enters into an agreement with a purchaser under the MOFA thereafter, this does not involve a sale of goods since that would amount to a second deemed sale of the same goods which cannot be brought to tax. Once a promoter has appointed a sub contractor the property passes to him as a promoter owner or to the owner as the case may be, where there is only a developer. Property has already passed on accretion and the same transaction of deemed sale cannot be taxed twice;

9. An executory contract does not fit into the conception of a sale of goods within the meaning of Entry 54 of the State List to the Seventh Schedule. Section 2(ja) of the Central Sales Tax Act, 1956 has brought in the definition of the expression “works contract” with effect from 13 May 2005. This should be held to constitute a law within the meaning of Article 286(3)(b) and to that extent the definition contained in the State Legislation would stand overridden.

5. Submission of the State Government

Submission on behalf of State Government by the Advocate General was narrated at para 8 of the Judgement as under:

1. (a) The provisions of Section 2(24) which defines the expression “sale” fall within the compass of Article 366(29A);

(b) A works contract is a contract to execute works and encompasses a wide range of contracts. The expression works contract is not restricted to building contracts having only two elements viz. the sale of material and goods and the supply of labour and services;

(c) The well settled connotation of the expression works contract is that a building contract may also involve in certain situations a sale of land;

(d) An unduly restrictive or contrived meaning should not be given to the provisions of Article 366(29A) otherwise the object underlying the Constitutional amendment would be defeated;

(e) The purpose underlying the enactment of the deeming fiction in Article 366(29A) was to override the limited definition of the expression sale in the Sale of Goods Act, 1930 and to isolate the sale of goods element involved, inter alia, in a contract which is a works contract;

(f) A works contract is one where there is a contract to do work and it does not cease to be such merely because any other obligation exists.

2. In an agreement which is governed by the MOFA, a conveyance of the interest in the flat or at any rate an interest therein is created at the stage of the execution of an agreement under Section 4. The doctrine of accretion is always subject to a contract to the contrary. The provisions of the MOFA contain a statutory stipulation to the contrary where the accretion to the property ensures to the benefit of the flat purchaser; and

3. The Trade Circular and the amendment to Rule 58(1A) are only clarificatory in nature.

6. Cases discussed

Various cases of High Court and Supreme Court were discussed in the Judgement are as under:

6.1 Prior to enactment of the Forty Sixth Amendments to the Constitution was elaborated upon in the Judgement of the Supreme Court in case of “State of Madras Vs. Gannon Dunkerley & Co.” (9 STC-2 AIR-1958 SC 560) mentioned in Judgement at para 10.

“………. Moreover, property in the execution of a building contract does not pass to the other party to the contract as movable property and the materials which are used in the execution of the construction become the property of the other only on the theory of accretion. In this view of the matter the Supreme Court held as follows:

“34. To sum up, the expression “sale of goods” in Entry 48 is a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement. In a building contract which is, as in the present case, one, entire and indivisible – and that is its norm, there is no sale of goods, and it is not within the competence of the Provincial Legislature under Entry 48 to impose a tax on the supply of the materials used in such a contract treating it as a sale.”

The judgment in Gannon Dunkerley, therefore, emphasised that where a building contract is one and indivisible, no sale of goods as such would be involved which could be the subject matter of a tax on the sale of goods. However, the Court clarified that if the parties entered into distinct and separate contracts, one for the transfer of materials for money consideration and the other for the payment of remuneration for services and for the work done, there would in such a case be really two agreements. In such a situation it was open to the State to separate the agreement for sale from the agreement to do work and render service and to impose tax on the sale of goods and materials.

6.2 The Hon. High Court has dealt with Report of Law Commission for the 46^th Amendment to the Constitution for amendment of Article 366(29A) clause (29A) at para 12 of the Judgement:-

“12. (29A) "tax on the sale or purchase of goods" includes

(a) 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;

(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

(e) 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;

(f) 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 drink (whether or not intoxicating), 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 making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.”

6.3 The validity of the Forty Sixth Amendment was upheld by a Constitution Bench of the Supreme Court in Builders Association of India Vs. Union of India (3-1989-2-SCC-645) (73 STC 204)

The Supreme Court, in the course of its judgment, held as follows:

“…….... Ordinarily unless there is a contract to the contrary in the case of a works contract the property in the goods used in the construction of a building passes to the owner of the land on which the building is constructed, when the goods or materials used are incorporated in the building. The contractor becomes liable to pay the sales tax ordinarily when the goods or materials are so used in the construction of the building and it is not necessary to wait till the final bill is prepared for the entire work.”

6.4 Further the Hon. High Court has dealt with another Judgement in case of Gannon Dunkerley v/s State of Rajasthan ((1993) 1 SCC 364 (88 STC 2047) at para 14 & 15 as under:-

“14. The effect of the Forty Sixth Amendment fell for consideration by a Constitution Bench of the Supreme Court in Gannon Dunkerley Vs. State of Rajasthan. The Supreme Court held that as a result of the Forty Sixth Amendment a contract which was single and indivisible has been altered by a legal fiction into a contract which is divisible into one for the sale of goods and another for the supply of labour and services. As a result, a contract which is single and indivisible has been brought on par with a contract containing two separate agreements. If the legal fiction in Article 366(29A)(b) has to be carried to its logical end, it would follow that even in the case of a single and indivisible contract there is a deemed sale of goods involved in the execution of the works contract. Such a deemed sale, according to the Supreme Court, has all the incidents of a sale of goods involved in the execution of the works contract where the contract is divisible into one for sale of goods and the other for supply of labour and services.

15. In the decision in Gannon Dunkerley (Supra) where the Forty Sixth Amendment was construed, the Supreme Court accepted the contention of the States that in order to determine the value of goods involved in the execution of works contracts, it would be open to the States to adopt a convenient mode for such determination by taking the value of a works contract as a whole and to deduct therefrom the cost of labour and services rendered by the contractor during the course of the execution of the works contract. The Supreme Court indicated that a deduction would have to be made from the value of the entire works contract of charges towards labour and services which would cover the following:

“a) Labour charges for execution of the works;

b) amount paid to a sub-contractor for labour and services;

c) charges for planning, designing and architect's fees;

d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract;

e) cost of consumables such as water, electricity, fuel etc. used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract; and

f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services;

g) other similar expenses relatable to supply of labour and services;

h) profit earned by the contractor to the extent it is relatable to supply of labour and services;

The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor.”

The Supreme Court has also emphasised that there could be cases where a contractor has not maintained proper accounts or the accounts are not found to be worthy of credence by the assessing authority. The Supreme Court held that in such cases it would be permissible for state legislation to prescribe a formula for determining charges for labour and services by fixing a particular percentage of the value of the works contract and to allow a deduction of the amount which is determined from the value of the works contract for the purpose of determining the value of the goods involved in its execution. However, the amount deductible under the formula towards charges of labour and services should not differ appreciably from the expenses for labour and services that would be incurred in normal circumstances in respect of that particular type of works contract.”

6.5 Observation of Hon. High Court narrated at para 19 of the Judgement as under:-

“19. The principal test, therefore, which was accepted by the Supreme Court, is whether the contract is principally for the transfer of a property in a chattel as a chattel to the buyer or whether it is for carrying out work by the bestowal of labour and service and materials are used in the execution of the work. The subsequent judgment of the Constitution Bench of the Supreme Court in Builders’ Association of India (Supra) adverts to the infinite variety of the manifestation of works contracts. The judgment in Builders Association also takes note of the principle that ordinarily unless there is a contract to the contrary, in the case of a works contract the property in the goods used in the construction of a building passes to the owner of the land on which the building is constructed when the goods or materials used are incorporated in the building. Hence, even the principle of accretion, which ordinarily applies, is subject to a contract to the contrary.”

6.6 Observation of Hon. High Court narrated at para 21 of the Judgement as under:-

“21. The Supreme Court has noted that there may be three categories of contracts: (i) The contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price; (ii) It may be a contract for work in which the use of the materials is accessory or incidental to the execution of the work; and (iii) It may be a contract for supply of goods where some work is required to be done as incidental to the sale. The first contract is a composite contract consisting of two contracts one for the sale of goods and the other is for work and labour. The second is a contract for work and labour not involving sale of goods. The third is a contract for sale where the goods are sold as chattels and the work done is merely incidental to the sale.”

6.7 Hon. High Court has consider the provisions of the Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, management and Transfer) Act, 1963 (The MOFA) observed in the Judgement in Jayantilal Investments vs. Madhuvihar Co-op. Housing Society (2007) 9 SCC 220 at para 27 as under:-

“27. In our view, the above conditions of true and full disclosure flows from the obligation of the promoter under MOFA vide Sections 3 and 4 and Form V which prescribes the form of agreement to the extent indicated above. This obligation remains unfettered because the concept of developability has to be harmoniously read with the concept of registration of society and conveyance of title. Once the entire project is placed before the flat takers at the time of the agreement, and then the promoter is not required to obtain prior consent of the flat takers as long as the builder puts up additional construction in accordance with the lay out plan, building rules and Development Control Regulations etc.”

7. Decision of Bombay High Court

7.1 Hon.Bombay High Court has dismissed the writ petition and held as under at para 32 & 33:

“32. We find ourselves unable to accept the submission which has been urged on behalf of the petitioners that the Legislature, in the provisions of Section 2(24) as amended, has transgressed the limitations on its legislative power by bringing what were not in their substance works contracts within the field of the amended definition. The submission which has been urged on behalf of the petitioners proceeds on the foundation that a works contract is a contract for the purpose of work which involves only two elements viz. a supply of goods and material and a supply of labour and services. Works contracts have numerous variations and it is not possible to accept the contention either as a matter of first principle or as a matter of interpretation that a contract for work in the course of which title is transferred to the flat purchaser would cease to be a works contract. As the Supreme Court noted in its judgment in Builders’ Association, the doctrine of accretion is itself subject to a contract to the contrary. The provisions of the MOFA, enacted in the State of Maharashtra, evince a legislative intent to protect the interest of flat purchasers by creating an interest in the property which is agreed to be acquired, in terms of the statutory provisions.”

“33. The effect of the amendment to Section 2(24) is to clarify the legislative intent that a transfer of property in goods involved in the execution of works contract including an agreement for building and construction of immovable property would fall within the description of a sale of goods within the meaning of the provision. Under Article 366(29A), the Constitution provides the constitutional content of the expression “tax on the sale or purchase of goods” in terms of an inclusive definition. The expanded content of that expression now provides the constitutional ambit of the legislative entry, Entry 54 of List II, which deals with taxes on the sale or purchase of goods, other than newspapers. All the instances of taxes which fall within clauses a to f of Article 366(29A) fall within the ambit of Entry 54. State legislation which meets the description of Article 366(29A) is hence legislation which would fall within Entry 54 of List II. In order to meet the description contained in clause b, State legislation must provide for a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. Such a transfer shall be deemed to be a sale by a person making the transfer and a purchase of those goods by the person to whom the transfer is made. The amendment made by the State Legislature does not transgress the limitations which have been imposed by Article 366(29A)(b) of the Constitution.”

7.2 The challenge to Rule 58(1A) was upheld in light of the Supreme Court Judgement in case of Gannon Dunkerley (88 STC 204) specified such deduction which can be made from the entire value of the works contracts. The Legislature was acting within the field of its legislative powers in devising a measure for the tax by excluding the cost of the land.

7.3 “36. In so far as the Trade Circular dated 7 February 2007 is concerned, the Commissioner of Sales Tax has only adverted to the decision of the Supreme Court in K. Raheja Development Corporation (Supra). The Circular, however, clarifies by way of abundant caution, that it cannot be used for legal interpretation and was only intended as a clarificatory guide. A trade circular is only meant for the guidance of the trade. A circular cannot override a legislative provision or an exercise in the nature of subordinate legislation. The constitutional validity of a legislative provision or of subordinate legislation cannot be determined by a circular. The attention of the Court has been drawn to the fact that the decision in K.Raheja has now been placed for consideration before a larger Bench. The judgment in K.Raheja did not involve a challenge to the Constitutional validity of the provisions of the Karnataka Act and the proceedings before the Supreme Court arose from the proceedings for assessment.

We have independently considered the constitutional challenge to the provisions of Section 2(24) of the Maharashtra Value Added Tax Act and the Rules and hold it to be lacking in substance.”

7.4 The State Notification dt. 09-07-2010 notifying Composition Scheme U/S. 42(3A) w.e.f. 01-04-2010 is within the State legislature power. There is no compulsion or obligation upon a registered dealer to settle. The Court may in an extreme instance interfere in the exercise of its powers of judicial review only where the terms of a composition scheme are ex facie arbitrary and extraneous so as to be violative of Article 14.

7.5 Further Hon. High Court has held that for the aforesaid reasons, we are of the view that there is no merit in the challenges addressed in this batch of petitions. No other submission has been urged. The Rule is discharged. The Petitions are dismissed. There shall be no order as to costs.

8. Implication of Judgements :-

Let us analyse the Judgements on the basis of submission of petitioners and revenue, various decisions discussed and the final decision of the Hon. Bombay High Court as under :-

1.1 Petitioner have challenged the Constitutional validity of power of State to levy tax on an agreement for the construction of building / premises on immovable property which is not a works contract, expanding the scope of definition of sales U/S. 2(24) of MVAT Act and Trade Circular issued by the Commissioner of Sales Tax.

1.2 The Petitioner has also challenged the constitutional validity of insertion of rule 58(1A) and Composition Scheme U/S. 42(3A), and legitimacy of notices issued by the Sales Tax Authorities.

2.1 The Hon. High Court has upheld that “we have independently considered the constitutional challenge to the provision of Section 2(24) of MVAT Act and the Rules and hold it to be lacking in substance.”

2.2 Similarly the amendment in MVAT Act & Rules U/S. 42(3A) and U/R. 58(1A) are valid within legislature power under the constitution.

3.1 The petitioners have decided to prefer an appeal to the Supreme Court against the Judgement along with petition of stay. If stay may not be granted by the Hon. Supreme Court then all the Builders and Developers will be required to obtain registration under the MVAT Act as the Judgement of Hon. Bombay High Court is binding in the State of Maharashtra.

3.2 It is learnt that many builders has either collected tax or collected an amount under the different head of accounts i.e. “Contingent Vat liability A/c.” “Customers tax liability Escrow Act” or many cases taken indemnity bond or bank guarantee to the extent of tax liability, or amount collected were kept in the fixed deposit with Bank in the name of purchaser. In short different modus of operandi adopted by the builders as per their connivance.

4. So far as criticizing of liability of tax will arise from the state of amendment of Section 2(24) i.e. 20-06-2006. Therefore for the tax liability during the period from 20-06-2006 to 31-03-2010 will be determined on the basis of the various method available under the MVAT Act which are as under:-

4.1 (A) Vat method

Under the vat method the tax liability can be worked out as under:-

Total agreement value of contract or valuation as per stamp duty whichever is higher		XXXX
Less : deduction of labour / service charges as per rule 58(1) sr. no. a to h (narrated above at para 6.4)	XXXX
Less : 70% of cost of land (proportionately to be worked out) U/R 58(1A)	XXXX
TOTAL		XXXX
Net balance amount liable to tax @5%		XXX
Input tax paid on purchases / expenses	XXXX
Less : Retention U/R 53(4)(b) @4% of the purchase price	XXXX
Net set off	XXXX
Add : Input tax paid on purchase of capital assets (U/R.52)	XXXX
Total set off available		XX
Balance tax payable		X

4.2 (B) Table method U/R.58(1)

Total agreement value of contract or valuation as per stamp duty whichever is higher		XXXX
Less : deduction @30% for construction work	XXXX
Less : 70% of cost of land (propo. to be worked out) U/R 58(1A)	XXXX
TOTAL		XXXX
Net balance amount liable to tax @5%		XXX
Input tax paid on purchases / expenses	XXXX
Less : Retention U/R 53(4)(b) @4% of the purchase price	XXXX
Net set off	XXXX
Add : Input tax paid on purchase of capital assets (U/R.52)	XXXX
Total set off available		XX
Balance tax payable		X

4.3 (C) Composition Scheme w.e.f 1-4-2010 U/S. 42(3A)

If dealer chooses to discharge the vat tax liability @1% of agreement value or stamp duty value whichever is higher, then liability can be worked out accordingly. As per the notification if dealer opt for the Composition Scheme then not entitled for input tax credit on purchases.

5. So far liability of vat for construction work done by builder or developer may be defer from case to case as there are so many issues are involved, however any of the above method can be worked out as per their convenience.

Conclusion :-

I have tried to analyse the ratio of the Judgement as per my knowledge & interpretation as student. I welcome your comments and suggestions if any. I thanks to Mr. Brijesh Cholera and all members of Managing Committee for giving me this opportunity.

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