A GUIDE TO SALES TAX ON APARTMENT BUILDINGS

Works Contract is most questioned and frequently litigated issue in the

Court of Law, and also between the purchaser of the flat and promoter.
The decision of the Honble Supreme Court in Gannon Dunkerleys case
stating that the expression Sale of goods as used in Seventh Schedule of
Constitution has the same meaning as in Sale of Goods Act made the law
commission in its sixty first report to recommend to amend the
Constitution of India - Accordingly 46th amendment was passed in 1982.
This empowered the states to legislate laws to levy tax on transfer of
property. The goods involved in execution of works contract may be in
the form of goods or in any other form. Article 269 of the Constitution
provides for levy of tax on sale or purchase of goods other than news
paper. In case of interstate trade and commerce, the tax is to be levied by
Government of India, but assigned to the states in which tax is leviable.

Article 286 of the Indian Constitution works as restraint on the authority

of the same.

Work contract
One has to distinguish the difference between contract of sale of goods
and contract of work. The difference is very thin. It is terms of the
contract and nature of the obligation to be discharged, which distinguishes
works contract from contract for sale.

In case of sale of goods, goods are delivered as they are to the purchaser,
whereas in case of works contract, the goods are delivered in a modified
form. This may be well explained in the purchase of readymade house,
which is sale of goods and contract to construct a house, which is a works
contract. In purchase of readymade house, the house is delivered as it is,
whereas in case of contract for construction, the house is constructed
using various materials and delivered to the purchaser. This is well
explained in case HAL Vs State of Karnataka (1984) 55 STC 314.
In another case HAL Vs State of Orissa,Honble Supreme Court has
observed that in contract of works there is a person performing or
rendering service on property, where as in case of sale of property there
is individual existence of the property as a whole, which is being delivered
to the purchaser.

Types of Contracts
There is no well established formula by which contract for sale and
contract of work can be distinguished. Any contract which contains not
only the work but also requires goods to be used may be of the following
three types;

Contract may be for works to be done for remuneration and also for
supply of goods in execution of work. This is a composite contract.

It may be contract of work in which use of materials is incidental to

the execution of the work. This is contract for work and labour not
involving sale of goods.

It may be contract for supply of goods where some work is required

as incidental to sale. This is purely a contract of work.

Agreements, where in land and buildings are conveyed to the prospective

purchaser and proper stamp duty is paid on such conveyance are transfer
of immovable property and are not liable to tax under sale tax laws.

Agreement with Builder

However we shall examine cases, where developer executes General
Power of Attorney in favour of builders for valuable consideration such
contracts may be any of the following types;

Power of attorney for valuable consideration.

For valuable consideration in part and partly by way of constructed

property.

Honble Supreme Court in Raheja Development Corporation Vs State of

Karnataka (Appeal [Civil]) 2766 of 2000 5/5/2000 observed that the
definition of works contract under Karnataka Sales tax is very wide and
not restricted to works contract, it also includes any agreement for
carrying out either for cash or for deferred payment or for any valuable
consideration, the building and construction of any movable or immovable
property.

Land being immovable property is not liable for payment of sales tax. But
when any construction takes on land through an independent contractor
on behalf of the builder, contractor executing the work is liable to pay
works contract tax.

Dual Role of Developer

We may also visualise a situation where a builder himself acts as
contractor. In such situation the sales tax department considers the
3

builder in dual capacity as contractor and as owner/builder. The

department is subjecting the builder to sales tax. The relevant case is
Mittal investments corporation Vs. State of Karnataka which was decided
by Honble high Court of Karnataka. It was held as follows;

If the building was first constructed and thereafter agreed to be

sold, then it was a sale of immovable property for which no sales
tax is attracted.

According to the agreement, some advance has been taken at the

time of executing agreement and the balance amount to be paid in
15 instalments

It has not been established that at the time of agreement, whether

construction has started by the builder.

The purchaser has to purchase the land from the purchaser and not
from the builder.

It is not clear whether plans were approved, before the execution of

agreement.

It was held that there is transfer of property in goods and liable for tax.
On review petition it was held, the builder would not be liable to pay sales
tax under section 5B in respect of buildings which have been completed
before entering into an agreement and also in respect of agreements
which have been entered after the construction of the building was
started. However, this was overruled by Honble Supreme Court in case of
K. Raheja Development Corporation Vs. State of Karnataka

Inference
The question whether a particular contract is for sale of goods or contract
for work or labour is very difficult to determine. The distinctions and terms
specified by various courts are not exhaustive. They mainly dwell on one
or two points which have come in the cases, which are rigid and can be
made applicable to all cases. The deciding factor would be the contents of
contract, the circumstances of the transaction of the prevailing custom of
the trade.The levy of the works contract tax is on the materials used in

execution

of

particular

contract,

the

property

which

is

ultimately

transferred.

Karnataka Sales Tax Act

The provisions relating to works contract under Karnataka Sales Tax Act
were inserted with effect from 01.08.1985 but were given effect from
1986.Section 2(29)(b) of KVAT Act deal with the Works Contract, which
refers to the property in goods involved in execution of works contract for
cash or deferred payment. Section 2(37) defines Works Contract as
works contract includes any 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.

The contractor has to include the sales tax in the quotation itself, so that
he can collect it from the principle and pay same to the Department, if not
he has to pay the sales tax on his own profit. The developer has to include
this clause in the agreement to sell and collect the tax from the purchaser
of flat and remit the same to the Commercial Tax Department.